Step 3 to Financial Independence — How to Get Out of Debt — Aussie Money Tips

Domino Your Debts

Once you’ve achieved your Emergency Savings Fund of say $2,000, as outlined in Step 2 Build an Emergency Savings Fund, you can turn your focus on reducing your debts.

As Scott Pape, The Barefoot Investor, suggests you ‘Domino Your Debts’. Start with the smallest debt first and use your surplus savings to pay this down as quickly as possible. When the smallest debt is repaid, turn your savings on the next smallest debt and so on. Alternatively, start with debt with the highest interest rate, such as credit card debt, and aim to pay this off as quickly as possible. If you have problems with credit cards cut them up. Pay them off, close the account and use EFTPOS or VISA Debit. I’m not suggesting this is easy to do, but it may be a solution if you have credit card issues.

If you have Debt, Get the Best Rates

Look at your mortgage, loans, credit cards and compare the rate you are currently paying. See if a competitor is offering a better rate. There are plenty of websites you can use, such as Canstar, to quickly compare rates. Contact your current provider and quote the competitors rate and ask if they will match. More often than not they will match. Banks and other lenders know it’s cheaper to retain you as a customer on a slightly lower rate than acquire a new customer. If they wont come to the party you can switch to another provider to get a better rate. Be mindful of any break/ exit fees or new application fees you may incur.

Avoid Consumer Debt

Consumer debt is money that is owed as a result of purchasing goods that are used for individual or household consumption. Typically these are items that depreciate in value, or don’t have monetary value one consumed. Examples are cars, holidays, furniture, clothing, eating out, groceries, etc.

It is said that debt is a Poor Master but a Good Servant. This means, if used well, it can help accelerate growth to borrow for assets such as a house or shares*. When debt, such as credit cards or Afterpay, is used to buy consumer items your don’t really need you can end up with tens of thousands of dollars of debt with nothing to show for it. This type of credit, if not paid off in full by the due date, is also very expensive. Interest rates can be around 20% per annum or more.

Avoid consumer debt all together as it can significantly hamper your progress to Financial Independence.

* I don’t advocate buying shares with debt, referred to as Margin Lending. If the market drops quickly you can be asked by the lender to either put up more capital or sell a portion of the shares. This means you’re forced to sell at the worst possible time as you would be locking in your losses.

If You Are In Financial Distress

If you are in financial distress and need help with how to get out of debt please call 1800 007 007 or visit National Debt Helpline for free financial counselling.

Read the Next Article: Step 4 Increase Your Saving Capacity

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