How to get out of debt


Dealing with debt is an inevitable part of life. It affects your credit scoring, employability, financial freedom, and wellbeing. Most of us have to pay off one loan or another. However, when several debts pile up on top of each other, it's hard to see a way out. 

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Don't worry; follow our tips to get yourself out of debt. Let's get to the following commonly asked questions:

  • What is debt?
  • How to get out of debt quickly?
  • Am I responsible for my spouse's debt in Australia?
  • How can I dig myself out of debt and save simultaneously?
  • What should I avoid when paying off debt?

Q1: What is debt?

Debt is something owed to another. Generally speaking, it's when one borrows money to pay for an asset, such as a car loan. With most debts, you pay interest on the amount borrowed. Therefore, you'll pay more than if you fork out a lump sum for your car.

However, not many of us have the financial flexibility to hand over considerable sums of cash. Therefore, we turn to lenders for our car or home loan

The problem arises when several loans pile up on top of each other. It might seem impossible to pay off debt faster than the interest builds up in such a debt avalanche.

Yet, not all is lost. There are plenty of debt management plans to prevent filing for bankruptcy and stop the debt collectors from knocking. 

Important: Seek financial advice about getting out of debt to stop money anxiety.

Q2: How to get out of debt quickly?

You don't need to pay off all your debt at once. Attempting to do so with debt consolidation loans might do more harm than good. Try to take each baby step at a time on the road to credit repair. 

To revive your credit score, follow a debt management plan. Soon, you'll be able to say goodbye to bad credit scoring and enjoy financial independence. 

Organise all of your debt and bills

Firstly, you should take a step back and assess your personal finance. Take a look at your net worth and how much you spend on each line of credit, other necessities, and luxuries.

Debt payments might include:

  • Credit card bills.
  • Auto loans.
  • Home equity loan.
  • Student loans.
  • Personal loans (or payday loans).

Necessary expenses:

  • Mortgage or rent payments. 
  • Necessary food and clothing.
  • Health insurance.
  • Home insurance.
  • Renters insurance.
  • Life insurance.
  • Travel insurance.

Then, look at your bank account to see where you could cut costs. Are there any subscription services that you don't need? Could your car insurers offer package deals? Once you have tracked your spending habits, you need to create a debt management plan. 

Step one: pay more than the minimum payment

One of the best ways to pay down debt is to pay more than the minimum payments. You will save money on interest and reduce your loan terms. 

Suppose you have a home loan of $400,000 with minimum monthly payments of $1,805. With an interest rate of 2.55%, you'll pay $141,367 over a 25-year term.

However, if you were to pay extra money of around $100 a month, you could save $10,997 in interest. Plus, you could shave one year and ten months off your loan.

Step two: try the debt snowball method

The debt snowball method is a way to reduce your total debt. Essentially, you make the minimum payments on all your debt but the smallest. With this one, you pay as much as you can. Accordingly, you eliminate each debt payoff quickly without overwhelming your finances.

Let's take a look at a debt snowball example. A borrower has $5,000 credit card debt, a $1,000 personal loan, and a $10,000 car loan. To pay down your debt with the snowball method, you would first focus on the personal loan. 

Note: the snowball method is an excellent way to stay on track. However, you should also consider interest rates and pay off higher rates as soon as possible.

Step three: debt consolidation

Another way to pay off debt is to consolidate your debts. However, it's worth speaking to a financial advisor before consolidating debt.

Debt consolidators combine multiple debts into one new loan. The risk with this balance transfer is that you pay more money overall. That said, it's a sensible debt management solution for some people.

For example, you have a $1,000 personal loan, $5,000 car loan, $2,500 credit card balance, and $5,000 student loan. Instead of paying off each individually, you would take out a new loan to cover each of your debts. 

Note: You would need to look at loan calculators to find the best way to make a loan and credit card balance transfer. 

Step four: refinance your debt

Refinancing your loans is a sure-fire way to pay off your debts fast. Perhaps when you first took out your real estate loan, you had poor credit reports. After a few years of repayments and home equity, you should get better mortgage rates. 

Consider different mortgage lenders to find the perfect financial product for debt relief. A lower interest rate could save you thousands. However, homebuyers should also look at the repayment plans frequency and loan term. 

Use a loan calculator to compare products. Speak to a mortgage broker or financial coach about loan refinance options

Similarly, with credit card debt, you might be able to pay your debt faster with a balance transfer card. 

Step five: commit extra income to debt 

If you're unsure about budgeting extra payments each month, think about making one-off sums to pay your debt. For example, when you get a tax refund, pay the extra cash towards your debt repayments rather than your checking account. 

Q3: Am I responsible for my spouse's debt in Australia?

You are not responsible for your spouse's debt settlement just because you are married. Although, you may become liable if you sign a loan as a joint borrower or guarantor. 

Important: If you want to help your partner manage debt, consider seeking financial assistance.

Q4: How can I dig myself out of debt and save simultaneously? 

Building wealth may seem challenging when you're also trying to pay off your debts faster. However, it is possible to save money with careful planning.

Firstly, set out your financial goals. A budget app or savings calculator can help you work out how to increase your income. 

Secondly, tackle your high-interest debt repayment. Additionally, make sure you don't miss any of your other payments. 

Thirdly, consider how much of your monthly paycheck you can set aside in money market or savings accounts. Other ways you can try saving money include:

  • Sell items you no longer need or want
  • Try not to increase your debt. Use debit cards to manage your monthly income better
  • Don't forget your retirement planning. Use retirement calculators to assess how much you can deposit into super funds. 

Important: high-interest savings accounts and investments are the best way to build your wealth. Consider money market accounts, a Superannuation, or a managed fund.

Q5: What should I avoid when paying off debt?

  1. Don't stick with the same old spending habits. Create a financial plan and follow it. 
  2. Don't do it alone. Seek the advice of a credit counselling organisation. 
  3. Not creating a reasonable budget. Make sure you have enough to spend on necessities. Try coming up with a money-saving strategy that is easy to stick to.
  4. Not creating an emergency fund. Emergency savings are crucial for unexpected circumstances (what if you lose your job?).
  5. Debt consolidation loans without advice. A badly consolidated loan could do more harm than good.

In summary, 

With an extra payment here and there or adopting the snowball method, you'll soon find yourself debt-free. The best way to ensure that you follow your debt management plan is to create realistic expectations. 

If you are tens of thousands of dollars in debt, you won't be debt-free within the year. You're more likely to stick to your plan and achieve financial independence with realistic goals.

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Disclaimer: The author is not a financial advisor, and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.

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