How to get out of debt (for good)!

Never in history has it been so easy to access credit. We’re being encouraged multiple times a day to use someone else’s money to get the things we desire. We are lured to buy new cars with interest free payments. New clothes and beauty products with Afterpay. We are offered cash back for using our credit cards and can furnish our house and pay it off over 48 months interest free. It’s no wonder people are finding themselves in more and more debt that they are struggling to pay back. Gone are the days of saving for something and paying for it in cash.

The result is that many people are now losing sleep worrying about paying their bills each month. Others may find themselves fighting with their spouse, feeling angry or fearful, suffering from a loss of appetite, muscle pain or general sickness. If this stress continues you could be at risk of developing anxiety or depression.

The good news is that by deciding enough is enough, it is possible to break the cycle and get out of debt. If you are at this point this guide will help you on your journey to becoming debt free and living a life of happiness and freedom. 

Step 1: Understand why you want to be debt free

You haven’t gotten into debt overnight so you need to understand that you won’t get out of debt overnight either. It’s likely you’ll need to make some sacrifices along the way and some days you’ll be motivated and find it easy, other days will be more challenging. 

This is when understanding your why becomes important. On the hard days you need to remember why you are doing it and what you want to gain from all the effort.  

Actions to take: 

1. Write down how you feel about your money situation today and what has prompted you to take action. Have you had a moment of truth that has made you realise things need to change?

2. Create a vision board - fill it with images or words you want to reflect your future and hang it in a place where you will be reminded of your aspirations daily.  

Step 2: Understand your relationship with money 

Did you know you have a relationship with money? We all have a set of subconscious beliefs that affect how we behave and act with money. For most of us these beliefs stem from childhood, observing how our parents behaved with money. For some people money is bad, they feel they don’t deserve money or having too much money represents greed. For others money is power and enables them to buy new cars or designer clothes that give them confidence and a sense of importance. 

Actions to take: 

1. Over the next week keep a journal of how money makes you feel. When you buy something note how you were feeling before you made the purchase. Perhaps you’d had a stressful day at work, a fight with your spouse or you received an invite to dinner and just had to have a new dress. Pay close attention to your spending triggers and so you are aware of your behaviour next time you are in a similar situation. 

2. At the end of the week reflect on your purchases. Do you still like what you bought? Does it make you happy or do you have feelings of guilt for spending money?

Spending money when we are emotionally charged is similar to overeating when we are stressed. You might be on a diet to lose 5kg before summer but every time an issue comes up at work you resort to cake, hot chips or ice cream and end up feeling angry with yourself later for undoing the hard work. 

Step 3: Acknowledge the issue

While it's easy to know we have an issue with debt acknowledging it is a lot harder. If you’ve realised your spending is out of hand and you’ve been avoiding doing anything about it, its time to go public!! 

Action to take:

1. Find a family member, friend or professional who you can confide in and be accountable to. They should be your cheerleader to celebrate your wins and help you through the hard times.

Step 4: Take stock and get organised

Now you are aware of your relationship with money and you’ve accepted that something needs to change. The next step is to understand your Financial BMI so that you can draw a line in the sand and move forward. This is by far the hardest and most scariest step, but also one of the most important. 

Do this step without judgement, don’t be hard on yourself for your past behaviours. Once you’ve faced the reality you can make a plan to move forward and work towards creating a healthier money relationship. 

Actions to take:

1. Find out your monthly income (what’s actually deposited into your bank account), 

2. Look at your last 3 months of expenses and estimate what they will be going forwards -  this should include everything - food, utilities, shelter, clothing, gifts, insurance, medical etc. 

3. Determine how much you owe. Write a list of all your debts, for each one include - the amount owing, the minimum payment, the interest rate, how many payments are left. Also note if any of your bills are overdue.

Step 5: Create a plan to financial wellness 

Now you have collected all your financial information it's time to create a plan. A plan to financial wellness will give you a map of how to become debt free and should allow for some fun along the way too. 

If you are serious about getting out of debt it's important to acknowledge the journey to becoming debt free won’t be easy. Sacrifices will need to be made if you want to get ahead. You can choose the pace of your journey by making fewer sacrifices or speed it up by going harder. Once you have reached your destination you will be able to reintroduce some of the things you’ve sacrificed along the way. 

Actions to take:

1. Create your spending plan - download my spending plan template here:

2. Determine what expenses are necessities - these usually include food, shelter, utilities and transport. You must prioritise paying these necessities before repaying your debt. 

3. Review your non essential items - identify things you are paying for that perhaps you could go without. Do you use your gym membership? Could you exercise at home instead? Could you stretch out your hair appointments by another week or two? Remember your why. If you want to get out of debt you have to start living within your means meaning spending less than you earn each month. Prioritise your non essentials and decide what you can go without. Try to free up as much money as possible each month to put towards paying off your debt.

4. Build yourself an emergency fund - start by aiming for $1,000. In the longer term this should be 3-6 months of expenses. 

5. Calculate how much money you have leftover to put towards your debt repayment each month.

Food for thought…  if you have a credit card debt of $10,000 with an interest rate 19.95% and make the minimum monthly repayment of 3% it’ll take you 22.5 years to repay and cost you $9,860 in interest! Do you really want to be paying for what you purchased today in 2040?! What else could you have spent that $9,860 on? 

If you decided you wanted to clear the debt and paid $500 each month you could repay the debt in 2 years and only pay $2,258 in interest.

Keep in mind how big an impact an extra payment can make on debt, review your non essentials again and see if there are any further adjustments you can make.

Step 6: Work out what debt payoff strategy is right for you

Did you know there are 3 main methods to paying off debt? The snowball method, avalanche method and divide and conquer. Here is a quick run down of each option:

Snowball

Made popular by Dave Ramsey, the Snowball method prioritises paying off your smallest debt first and then rolling that payment into your next highest debt. 

Who it’s best for:

This method works best for those who love instant gratification and need quick wins to stay motivated. You will pay off small debts quickly which confirms what you are doing is working.

How it Works:

Organise all your debts’ remaining balances from lowest to highest. Pay the minimum payments to all balances except the lowest remaining balance. Throw all extra money at that debt. Do this until that debt is paid off. Then throw all extra money at the next lowest balance, and so on until you are debt free. 

Avalanche

Made popular by Suze Orman, the Avalanche method prioritises tackling your highest interest rate debts first.  This method works well for people who are driven to get out of debt and don’t need a quick win to stay motivated. 

How it works:

Organise your debts by the highest interest rate to lowest. Pay the minimum payment to low-interest rate debts and the most that you can to the debt with the highest interest rate. These high-interest rates cost you extra money each month, so if you eliminate the highest debt first you have even extra money to pay off debt each month.

Benefits

This strategy allows you to pay off the debt that is costing you the most money because of the high-interest rates.

Divide and Conquer 

If you have multiple debts the worst thing you can do is try to pay a little bit more than the minimum towards all of them.  When you do this, you divide your money and don’t conquer anything.  The best option is to pick one debt to pay off, pay the minimums on the rest and throw every extra penny on the one debt that you chose to tackle first.

Actions to take:

1. Choose your debt repayment method 

2. Set up the payments required to tackle each debt

Step 7: Chop up your credit card

Once you have your spending plan and debt payment strategy in place it’s time to chop up your credit card for good! This may be hard and you are allowed to cry! But remember you’ve built yourself an emergency fund so you no longer need your credit card as a safety net. Keeping your card will give you temptation to use it undoing all the hard work you're putting in to paying it off.

If you're an online shopper then get yourself a debit card.  From now on you're only going to be spending money you actually have.

Actions to take: 

1. Take a selfie with your cut up credit card and post to instagram with the hashtag #goingdebtfree

Congratulations on reaching this far! You’ve officially got yourself a plan to reach financial wellness. 

BONUS: Here are some additional tips to help fast track your journey to becoming debt free.

1. Review your necessities and see how you can reduce them - ie shop around to check your electricity charges are competitive, talk to your insurance provider about getting a better deal on your insurances. Swap branded food items for home brand at the supermarket. You have potentially to save hundreds of dollars on these items each year.

2. Temporarily suspend subscriptions or cancel ones you no longer use.

3. Calculate what your bad habits are costing you - how much are you spending on alcohol, sweet treats or cigarette each month? Could you halve the consumption? Finding just $20 a week will give you another $1040 per year to pay off your debts. Not only will you improve your financial health but also your physical health!!

4. Look for other ways to have fun - instead of a night out with friends can you host a pot luck dinner at home? Can you exercise at home or with a friend outside rather than having an expensive gym membership? Some online programs cost less that $150/year and you don’t even have to leave the house.

5. Look at what you can sell - do you have an old phone lying around that could earn you $200? Do you have a designer handbag or clothes you no longer use that someone would be willing to buy from you? How about that bread maker you bought with great intentions but never ended up using? Or the pram your kids have now grown out of? I challenge you to make $1,000 selling things you no longer need in the next week. 

6. Review your car situation - could you downgrade your car and help become debt free sooner? Could your family cope with having one car? Not only would this help repay debt but it’d save a lot from your monthly budget with insurance, petrol, servicing etc.  

7. If you regularly buy your lunch at work try taking your lunch from home. Initially aim for 3 days a week, you’ll be surprised how much you can save by doing this and once your in the routine of making it you’ll find it’s not that hard - if you saved $8/day by taking your lunch 3 days a week this could save you $1,152 a year! In my husbands case he was buying lunch plus a coffee 5 days week, he now takes his lunch everyday and has his coffee at home saving us over $3,400 per year!!!

Deciding what to sacrifice to become debt free sooner is a matter of priorities. understand what effect having debt is taking on your mental, physical and emotional health. It’s important your plan reflects what you are comfortable with.

As you go on your journey to becoming debt free allow yourself time to have fun. I suggest every 5-6 months taking the extra money that you were going to put on your debt payment and treating yourself to something new. That’ll help keep you motivated and help to reduce the risk of self sabotage.

Once you do become debt free make it a goal to remain debt free. If you can’t trust yourself with a credit card then continue using a debit card plus cash. If you do want another credit card then get one with a limit you can afford to pay in full each month. 

Think about how you can use your monthly debt payments to work towards financial freedom in the future - build your emergency fund large enough to cover 3-6 maths of expenses, start investing, or use the money to save so you don’t have to rely on credit for your next car purchase.