Our Step by Step guide to get out of debt.

You can’t get ahead if you can’t get a hold on your debt.


 

SARAH ROGERS: OUR STEP BY STEP GUIDE FOR GETTING RID OF DEBT

  • ARE YOU DISSATISFIED BECAUSE YOU ARE SPENDING MORE THAN YOU ARE MAKING AND FIND YOURSELF IN DEBT?
  • IS THIS CAUSING PROBLEMS IN YOUR RELATIONSHIPS, FOR YOUR STRESS LEVELS, AND YOUR QUALITY OF LIFE?
  • DO YOU SEE PEOPLE AROUND YOU INVESTING AND GETTING AHEAD BUT FEEL LIKE YOU ARE CAUGHT IN THE RAT RACE?
  • ARE YOU LYING AWAKE AT NIGHT WANTING THINGS TO BE DIFFERENT AND KNOW THINGS CAN BE BETTER?
  • ARE YOU WANTING TO CHANGE & FINALLY LIVE LIFE ON YOUR TERMS?

 

I often see every day people, just like you, that are trying to get ahead, but get caught out by the big debt merry-go-round, never feeling like they are getting ahead. Don’t feel you are alone. Debt is a major problem for Australians, we have one of the highest levels of debt per person out of all the countries in the developed world.

The problem is, a lot of the time people realise they are in debt and it’s crushing their lifestyle and their happiness, but they never take the actions needed to get ahead. This means they will never have the money to buy the things they want to, or to take the family on the holiday that is well overdue.

Their concern is that they don’t have any spare money, so how on earth could they possibly pay off this debt and stop living on credit?

However, once they have put a good budget in place, and followed our step by step system to pay down debt, they have realised they no longer have their money controlling them. They have now paid off their bad debt, and even started investing. Some clients I’ve worked with, who used to have piles of debt and no budget system, now have multiple investment properties, a portfolio of shares, and money put aside for a rainy day. Let me tell you how much happier they are feeling now. You too can be in this position soon by following our simple process.

What is bad debt?

Bad debt includes;

  • Credit cards
  • Store cards
  • Personal loans
  • Car loans

Bad debt includes any debt that gives you no real benefit, or it’s for a depreciating item – meaning the value of what you buy goes down. Bad debt normally also has higher interest rates as the banks know that there is more risk to it, meaning the banks charge more for you to have it which equals you paying more.

There is one item that falls under bad debt to some finance gurus which I’m comfortable with you having, this is a home loan, although it is better if you have a plan in place to pay this off faster, the idea is hopefully the house will be going up in value.

The other debts that fall under ‘good debt’ are investment loans for shares or property, or business loans if you have a business. These are classified as ‘good’ because you get a tax deduction for the loans, plus the idea is that your business or your investments should be going up in value.

 

Step 1

Make a list of all of the debts you currently have, include the amount owing, the interest rate, and the minimum repayments.

An example of this is:

Debt Type/Provider Amount Owing Interest Rate Minimum Repayments
Car Loan  $      18,000.00 8% $365pm
Personal Loan  $        9,000.00 13% $205pm
Home Loan  $    320,000.00 5% $1,718pm
Credit Card  $        4,500.00 19% $55pm
GE Store Card  $        2,200.00 22% $35pm
Debt to Dad  $           450.00 0% na

 

Consolidating Debt

Look at the list of debts you have. If you have credit card debt you are not going to pay off in the interest free period or shortly after, or if you have high interest personal loans, this might be a good time to consider debt consolidation.

You could move your credit card debt to a credit card provider that is offering an interest free term for balance transfers, this can be up to 24 months. This means you won’t pay any interest on what you owe and can put a plan in place to get it paid off in the interest free period. Make sure you do!

The other thing you could consider is consolidating car/personal loans. You could put these in to one. Or you could consolidate this into your home loan. But before you do this. Work out the figures, is the cost of refinancing worth the interest solved? And if you move it into your home loan, make sure you split this amount of debt, so its not bundled up with your home, you don’t want to be paying the car off for 30 years when it is long gone. Pay the repayments you were paying off it previously and get it cleared.

See a broker or adviser about what is best for you if you are not sure.

Step 2

Now put this list in order.

If you have small debts under $1000 list these first, these might include a toll or speeding fine, or some money you might owe to someone personally. This should always be a priority to pay back. The fines are a priority, because if you don’t pay them, they will keep going up! I have seen young people with thousands of dollars of toll fines because they put their head in the sand and did nothing. If this sounds like you, call the provider and see if you can get a discount or go on a payment plan, and do it FAST!  Then list all of the other debts you may have, listing them by the highest interest rate first.

An example of this is:

Debt Type/Provider Amount Owing Interest Rate Minimum Repayments
Debt to Dad  $           450.00 0% na
GE Store Card  $        2,200.00 22% $35pm
Credit Card  $        4,500.00 19% $55pm
Personal Loan  $        9,000.00 13% $205pm
Car Loan  $      18,000.00 8% $365pm
Home Loan  $    320,000.00 5% $1,718pm

The minimum repayment amounts for these debts should have been built in to your expenses account and have regular payments coming out of there. If you are not sure what I’m talking about here, it might be a good time to look at your budget too and complete my 4 step budgeting workshop

Step 3

Now to look at the best way to pay off this debt.

Once you have saved one month worth of expenses or $2,000, whichever is more, in your buffer account, any money over that we will use to smash out your debt. The reason we save this $2,000 first, is so you don’t have to use credit in the future for emergency bills or general living. This is your buffer or emergency account.

Starting with the debt on the top of the list, use the extra money above the $2,000 buffer to pay off this amount until the debt is paid. If you’ve done my budgeting workshop, you will know that this will be 20% of your income you are using for this, which is what you will be saving once the debt is paid off.

Once this first debt is gone, take the extra money above the $2,000 buffer PLUS the minimum amount you were paying on the debt you just cleared and start paying that amount off the next debt on your list until that is paid and you repeat the process over and over again until all of your bad debt is paid.

Excluding your home loan and investment/business loans. This might be a longer process.

Sarah’s Tips

  • Cut up your store or credit cards as soon as you reach the safety net of $2,000 in your buffer account

The most important part is to cancel each of these credit cards or loans once they are paid so you don’t get yourself back in to the same situation

Once you have paid off all bad debt, congratulations, you’ve made it! You are now taking real steps to becoming financially free.