What to do if you're struggling with Debt
Let’s talk about debt. Specifically, let’s talk about struggling with debt. Did you know that January and February are the months where the highest rates of financial stress are experienced? It makes sense when you think about it. It’s the months directly following the Christmas period - a period when most Aussie’s spend up big. According to research by Finder, the average Australia spends just shy of $1000 over the Christmas period. The problem is that 1 in 4 Australians don’t have the cash saved up to pay for this and instead rely on credit cards and loans to supplement the cash shortfall. Ever noticed that there’s a spike in advertisements for debt consolidation or 0% credit balance transfers in January and February? Yep - it’s because financial institutions know that these are the months that you’ll be feeling the pinch and looking for a fix to your looming loan repayment and credit card bill.
Did you know that January and February are the months where the highest rates of financial stress are experienced
The risk, of course, with a 0% interest balance transfer is that the lender will typically give you 0% balance transfer up to 70% of the credit card limit.
So, say you have maxed your credit card with an outstanding credit card balance of $2000 which you want to transfer to 0% interest card. The new lender will let you do so, provided you take out a new card with at least a $2900 limit (rounded up to nearest $100). The problem is that you now have an extra $900 of available credit. Assuming you don’t spend this and you’re diligent about paying off the outstanding debt before the interest free period expires, then you’ll be fine and have saved yourself some interest whilst you paid back the debt. If, however, you are tempted to spend the extra credit and/or fail to pay the balance off in time, you may find yourself in more debt and paying hefty interest on the balance. Ouch.
Debt consolidation is another popular option for managing your loans. Essentially, if you’ve got multiple credit cards or loans and are struggling to pay them off or find paying multiple loans at once difficult then you may choose to consolidate the debts into a single loan. In this scenario you take out a personal loan to pay back (and, ideally close!) the other loans and credit cards. The benefits of doing so can be consolidating your loans repayments to one single payment, possibly securing a cheaper interest rate across you loans, and possibly lowering your repayments. The cons of debt consolidation is that you may end up accumulating more debt because you’ve free’d up credit and are tempted to spend more and thus could accumulate more debt than what you started with, you could also end up spending more repaying your debt because whilst you lowered the repayment you increased the term of your debt and as a result end up spending more in interest over the years, or you may impact you credit score if you don’t keep up with your repayments and default.
Let's get back to talking about financial stress and managing debt.
The best way to get on top of your debts is to get started with a plan to repay them. Simple, I know but I can’t tell you how many clients I’ve worked with who prior to engaging a coach or financial advisor simply won’t open their credit card statements, or avoid looking at their bank accounts. Closing your eyes and singing ‘lalalalala’ won’t make the problem go away. In fact, it will probably make it worse. You’ve got to own your situation to take back control.
What do you owe?
So first things first, work out what you owe. Write down everything you owe including the amount owed, the minimum repayment and how much interest you are paying.
Now you have all this handy information in black and white let’s start making a plan of action!
What can you afford to pay?
What can you afford to repay? You absolutely want to make at least the minimum repayment across all your loans. Failing to make the minimum repayment amount could result in a loan default and adversely affect your credit score. If you’re worried about making the minimum repayment, reach out to your lender or National Debt Helpline to seek financial hardship support. The sooner you get help, the sooner you can get on track. There’s no shame in asking for help to get on top of debt.
So aside from paying your minimum repayment, how much extra cash could you direct toward paying down your debt faster?
Which debt will you prioritise?
The third step is to prioritise your debts and focus your spare cash to paying off one or two debts in full at a time.
The Snowball Method suggests paying extra cash toward your smallest debt first. The logic of this is that paying off a debt in full will create a sense of achievement and encourage you to keep going.
The Avalanche Method suggesting paying off the debt with highest interest rate first. The logic behind this is that it’s your most expensive debt and by paying it off first, you save money in interest. Whichever method you chose, get focused and start paying that debt back!
Build up your OMG Fund!
Once you’ve paid off your debts and after you’ve celebrated your financial adulting success (cue a glass of champagne and a victory lap of your lounge room with ‘Celebration’ by Kool and the Gang blaring) it’s time to build your cash buffer. Also known as, the OMG Fund. This baby is your financial equivalent of the ride or die friend. You know, that friend that’s always there to get you out of tight spot. The one who’s always go your back? That’s what the OMG Fund is for your finances. This is money set aside in a fee free, high interest savings account to prevent you from getting caught in the debt cycle again. It’s there to help you deal with unexpected expenses. Start by saving $1000. If you can manage it, save the equivalent of three to six months worth of living expenses. That way, when life throws you a little curve ball, you’ve got a safety net of cash to help catch you!
Finally, I want to acknowledge that dealing with financial stress and managing debts is not easy. RFi Group data also highlights that 1 in 4 (28 per cent) Australian consumers feel overwhelmed by financial burdens, with those aged under 35 the most likely to feel overwhelmed (41 per cent). It can have adverse affects on both you physical and mental health if left unchecked for too long. Signs that you might be experiencing financial stress include:
Arguing with those closest to you about money;
An inability to sleep or experiencing disrupted sleep due to money worries;
Mood swings like feeling angry, overwhelmed and fearful;
Feeling tired; and/or
Muscle fatigue
If you think you may be suffering from Financial Stress seek help. There is free support available with the National Debt Helpline who can help you make a plan and work out what option is best for you to get on top of your debt. In addition to this services like Beyond Blue, Lifeline, Salvation Army and Centrelink are there to help you if you’re in a crisis and struggling to make ends meet.
Everything is figureoutable
When you're feeling overwhelmed by money or personal issues, it can be hard to know where to turn but just know that you don’t have to go it alone. As my favourite lady hero Marie Forleo says, everything is figureoutable. You just need to take the first step toward finding a solution.
You’ve got this.
DISCLAIMER The information in this article is for general information and educational purposes only. Nothing contained in it is, or is intended to be construed as individual financial, tax or legal advice.
You need to decide what may work best and is suitable for your own personal or business needs. I do not have your personal information, your individual, business or product facts or situation in mind when I provide this information and any content. It does not constitute nor should it be treated as formal advice of any type or nature. You need to make your own enquiries and analysis to determine if any of the information is suitable for your own particular purposes and suitable for your situation.
You should, before you act or use any of this information, consider the appropriateness of this information having regard to your own financial situation and requirements. Please see the website disclaimer for further details.