3 tips to help you get out of debt sooner

by | Dec 6, 2022 | Future Planning

Conversations about Debt are becoming more relevant and of greater focus to everyday Australians, in the wake of the Reserve Bank of Australia (RBA) having increased the cash rate from all-time lows of 0.1% to 3.1% at the time of writing. Given all of this, in the June 2022 quarter the total dollar amount of residential mortgages rose by $3.5 billion (2.7%) to $133.7 billion – although there has been commentary of housing market slowdowns and forecasted price reductions in major capital cities, in the short-term.

Regardless of all this jargon, what this likely means practically for everyday Australians is that your regular loan repayments have increased, or are soon to increase for those who were prudent (lucky) enough to convert to Fixed rate loans. You’re probably thinking, how can I prepare or best prepare myself and my finances to tackle these rate rises, but also get ahead on paying down my debts.

Well, below is 3 key tips to help you do so………..

1. Take stock of how much you owe and to whom – this involves listing out what loans you currently have including:

a) Mortgage

b) Credit cards

c) Personal loans

d) Car loans

e) Investment loans

Please see the below table as a practical example of this:

2. Decide on a debt reduction strategy – when it comes to debt reduction, there are a few strategies that have proven effective as follows:

a) High interest focus: this would involve making the minimum repayments possible on every loan with the exception of the one you’re focusing on eliminating (highest interest). Once complete, work down the list towards the second highest interest rate and repeat this process. This strategy will likely result in you paying less interest overall whilst reducing your debts.

b) Snowball method: this strategy differing from the first (above) but focuses on paying off the debts from smallest (by dollar figure) to largest, regardless of the corresponding interest rates and fees. This strategy focuses on building debt reduction momentum and although you are likely to result in paying higher interest overall, but you gain a sense of achievement and accomplishment.

c) Debt consolidation: this strategy involves combining all of your loans into a single debt account for ease of administration and creating a single loan source & repayment. And wait… whilst this sounds like a “no-brainer” it should be noted that this strategy may not be available for everyone, as your bank/lender may not allow you to consolidate all of your debts due to numerous factors. This is one area we’d highly recommend seeking the professional services of a Mortgage Broker or Debt Consultant.

3. Look for a better deal – shop around, negotiate and barter! Whilst it is not always at the top of our priority lists, it is a move that has proven to save hundreds and even thousands of dollars in interest.

Shop around:

a) Credit cards – credit card interest is nasty and can range anywhere from 10 – 25% p.a. in interest. Tip – this is something that you can be smart about and look to take advantage of 0% balance transfer credit card offers, or interest free credit card offers (between 12-24 months) on balance transfers – should you qualify based on the terms & conditions. To truly “reduce debt”, you should aim to have the new (offer) credit card paid off in full before the “honeymoon offer” date, reverts to normal credit card interest rates which stereotypically are greater than 20% p.a.

b) Mortgage / Investment / Personal loans – first point of call is to contact your existing bank/lender and attempt to negotiate a lower rate on your mortgage, simple! Perhaps not so, as it has been widely touted that being a loyal customer to any one bank or lender does not result in you getting a better deal on your interest rate, as noted in this finance article. Click to view. Tip – do your homework, shop around and seek out comparisons from different financial institutions – be weary of “hot offers” and deals that simply seem to good to be true.

Jayden’s grand tip – seek a comparison from a professional!

Personally, I could not recommend the professional services of a mortgage broker enough. They provide loan & debt related assistance, by sifting through the jargon, comparing loan deals on a like-for-like basis and then providing guidance on an appropriate debt reduction strategy.

Better yet, if you proceed with a loan under their services – they take care of the majority of loan related correspondence (with banks) and paperwork to get your loan accepted, and then can assist you in the future with “reviews” or “refinancing” (i.e. looking for better deals)

Where to go for help if you’re struggling with your debts

If your debts have become unmanageable there are Financial counsellors available, who are skilled professionals providing advice and support to people struggling with bills and debt.

A financial counsellor can:

  • assess your financial situation
  • provide advice about what to do if you’re struggling to pay bills and fines
  • help you negotiate with government agencies, your landlord, utilities, telcos, and other creditors
  • assist you if you’re being harassed by debt collectors
  • refer you to other services you might need, such as legal, accommodation, health and crisis services
Financial counselling is a free service, contact details can be found here.

Jayden Allison CFP®
MFinPlan, BCom (Eco&Fin), Dip. FS (FP)
Financial Planner

General Advice disclaimer

The general/factual information provided was done so without taking into account your personal objectives, financial situation or needs; you should consider the appropriateness of the general/factual information, in light of your own objectives, financial situation or needs, before following or relying on the general/factual information; if the general/factual information relates to the acquisition or possible acquisition of a particular financial product, then you should obtain a copy of, and consider, the Product Disclosure Statement (PDS) for that product before making any decision.