Break your debt cycle—debt consolidation

Consolidating your debts may be a smart way to reduce and manage your repayment stress; however, the key is to break the debt merry-go-round.

Does your life in debt feel like you are treading water in deep seas with a leaky snorkel and mask?

Debt can become overwhelming, anchoring you to a lifetime cycle of repayments with no end in sight.

A debt cycle means that you are simply adding more debt as you repay it. It’s not just a case of cash in, cash out - with debt comes interest penalties. Carrying $20,000 in credit card debt, for instance, may mean you are paying $100 or more in interest each and every week, on top of the money you are already owing a financial institution.

The only way forward obviously is to spend less and repay more, but how?

It’s not just about setting in place a plan - it’s about bringing the plan to life. All the nicely laid out budget spreadsheets in the world won’t help you turn the tide if:

• It’s not achievable
• You haven’t included everything
• It’s hard work to implement.

Budget

First things first: make a budget you can stick to. And, once done, set up all the transactions to be processed automatically.

Human nature means we sometimes shave the edges off our bill repayments with the view to having more cash in hand when we pay our bills manually.

Conversely, the ‘set and forget’ strategy for bill payments means we are better able to stick to the budgets we’ve made.

In setting a budget, all your essentials take priority. Set up payments to bring you into advance over time for bills such as electricity, internet and the telephone. Many providers offer pay on-time discounts, and every cent counts.

Immediately after the essentials, you should also set up automatic savings deposits. This will help bring you into a position where you can make larger purchases in cash.

Finally, the remainder of your budget is available for your discretionary spending. Caution though before you hit the post Christmas sales and ask yourself “how will this purchase change my life”. If it doesn’t, do you really need it?

Track and adjust your spending habits

The bottom line is: spending money is easy - too easy. For many people overwhelmed with debt, the commonality is that they don’t know where all their money is being spent. When you track every transaction it can be surprising to confirm that wastage isn’t limited to the soggy celery in the refrigerator or the out-of-date pantry staples.

In the age of instant gratification, we have boundless opportunities to waste money - on pay television, online apps (such as ringtones, screensavers and gaming boosters), takeaway coffee and more.

Recording your spending habits with a spreadsheet or app can help you record and track your expenses and identify the areas where you spend most of your hard-earned cash, helping you to plan and stay on top of your finances.

Credit scores are a moving feast

Credit reporting has changed, and in ways that means our day-to-day financial choices can affect our overall credit score.

In July 2018, the Comprehensive Credit Reporting system began rolling out across Australia. Your credit report includes information on the amount, purpose and source of each credit product you have used. Importantly, it now also includes information about your repayments and treatment of credit, including repayment history. In any given month your score can change, depending on your repayment reliability.

In Australia there are three national credit rating agencies that collect your data and collate a score: Equifax, Experian and Illion.

Your scores will be between zero and 1000, or zero and 1200, depending on the agency you use. The higher the score, the better your credit reputation.

Lending has also changed. Banks and finance lenders now take a detailed view of your spending habits and transactions. This means that culling your wants and focusing on your needs will have a dual benefit of reducing your debt while also providing the platform for better rates and deals on major lending, such as for a mortgage.

Digging your way out of debt may sometimes seem like an endless battle. There are no quick fixes - it’s a long game. Bear in mind though, the tipping point will come just beyond the halfway mark where the traction you build leads to a forceful momentum.

Once you’re on the front foot, you need to maintain this approach to build a solid financial future.