Hey Big Spender!
Tips and traps for managing debt
So, you’re in a sticky situation.
Student loans, credit card debts and out of control mobile phone bills have you tossing and turning in bed at night.
You’re not alone. In Australia today, the average 25-year-old owes approximately $25,000.*
While not all debt is bad – taking out a loan to purchase something that will increase in value and can contribute to your overall financial welfare (like undertaking study or investing) is much better than using debt to buy unnecessary consumables (the latest winter boots for example) – the best approach is to avoid debt like the plague. It’s one slippery slide you do not want to ride.
Here are Osborne Yuille’s top 10 tips for getting off – and staying off – Struggle Street.
Avoiding Debt
1. Don’t spend more than you make.
Sounds simple, huh? But it’s easier to live beyond your means than you think. Relying on credit, dipping into savings and borrowing from friends and family are all ways of spending more money than you earn. Before you know it, your savings have vanished, your credit cards are maxed out and no-one else is willing to lend you cash. Develop the habit of saving for things before you buy them.
2. Start a budget.
Yeah, yeah. That’s what your folks keep saying right? But it really can make the world of difference. And it’s much easier than you think. Budgeting is simply keeping track of all the money you bring in, and all the money you spend. You might be shocked to see some of the things you waste money on and, if you can shave a few expenses here and there, you may even find some extra cash to spend on something you’ll really appreciate. Check out Osborne Yuille’s free online budget planner here.
3. Understand your credit card
- Many credit cards advertising sound great, but pay attention to the fees and any hidden costs. Always read the fine print and, if in doubt, ask!
- Try to pay more than the minimum amount off your credit card each month. Minimum payments usually only cover interest and a tiny portion of the balance owed. They are set up by financial institutions to draw out payments (and interest charges) for as long as possible. While paying the minimum amount keeps your credit history clean, it also costs you more in the long run.
Sample scenario
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Every time you make a repayment, try to pay off the purchases you made during the past month, plus interest and a portion of the balance. This will help to chip away at your balance a lot faster.
4. Watch out for ATM fees,
particularly if you use another bank’s ATM where higher fees may apply. A couple of dollars here and there can certainly add up over a year. Also, take care not to overdraw on funds. Often the ATM will give you what you ask for, but if you don't keep an eye on your balance you can easily overdraw. When this happens, you may get slugged a $30 or $40 fee from your financial institution.
Reigning in Debt
One of the worst things you can do when it comes to debt, is ignore the situation. The problem won’t go away if you stick your head in the sand; in fact things will only get worse.
5. Look at ways to:
- Increase your income. If you’re studying, is part-time or casual work an option? Perhaps you already work, but have capacity to take on a second job?
- Decrease your expenditure. Use a budget to separate your needs from your wants and identify areas of potential saving.
6. If you have multiple debts, try to make extra payments (not just the minimum required) on the ones with the highest interest. They may cost you more money in the long-run, so it makes sense to pay them off first.
7. Can the credit cards!
- If you haven’t already, apply for a low-rate credit card, one with zero-interest on balance transfers. Then transfer any credit card debts across. This will give you some breathing space, while you whip your finances into shape.
- Cut up all your credit cards – including the new one – and STOP spending until you’ve paid it off in full.
- Once you’ve cleared your debt, apply for a debit card so you can still buy stuff online and pay bills. Debit cards function like credit cards, but draw on money in your bank account, rather than a line of credit (i.e. money that doesn’t really belong to you).
8. Consider organising your pay so that a certain amount is automatically directed into a bank account earmarked exclusively for paying off debt.
9. Beware Debt Consolidation Loans (a single loan obtained to pay off multiple debts). If the consolidation loan has a lower interest rate than the interest rate on your largest loan, then it might save you money to consolidate. However, in most cases, consolidating or refinancing won’t save you money.
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10. If you’re having difficulty making a repayment, contact the creditor (the person or business you owe money to) to discuss other ways to meet your commitments.
*Financial Literacy Foundation
Useful Links
The Australian Financial Counselling and Credit Reform Association offers free counseling for young people in financial strife. Visit: http://www.afccra.org/counselling.htm