How to Get Out of Debt

It is so easy to get into debt these days. All the stores promote ‘interest fee’ for x months deals, while AfterPay makes it almost impossible to not give in to impulse buying when you see that shiny new thing you’d love to have. With credit so easy to get, it’s not long before you are knee deep in debt. Often the situation creeps up on you and you don’t realise how bad it is until you just can’t work out which bills to pay first or where to find the cash to pay them in the first place.

Step-by-step Get Out of Debt Plan

We’ve created a 12-step guide to help you get on top of your debt situation and get out of debt.

1. Create a list of all your debts

Before you start, you need to work out exactly how much money you owe and what finances you need to survive. Tackle the debts first. Identify all debts including credit card overdrafts, home or car loans, personal loans, and any other debts you have (including loans from friends or family). Writing them all down is going to help you see exactly where you are at. Create a list of these debts, writing down:

  • The debt
  • Amount Owing
  • Interest Rate
  • Minimum Monthly Payment.

Track your progress – come back to this list and update it each time you make a payment.

2. Create a monthly budget

Creating a budget may seem like a pain, but it is important if you want to work out what you need and can afford. If you really struggle with this, seek out financial advice and support – there are many free financial counselling services who can help you with creating your budget.

Start by listing all your regular monthly expenses, this will help you work out how much money you need to survive and see if there are things you can drop off the list for now. Remember to include groceries, petrol, rent, insurance (including health cover), utilities, and other living expenses. Next, include your income so you can see what money is coming in. You can then create a realistic budget that includes a debt repayment plan.

If the expenses and debts are more than you earn, don’t panic. First, look at how you can reduce your expenses. Do you have some memberships like Netflix or iTunes you could cancel for now? TRy meal planning instead of getting regular takeaways or dining out, put away the credit cards and aim to pay cash instead. You’ll need to take on the policy ‘no money, don’t buy’. Even simply looking at ways to reduce your water and electricity bills can help.

3. Reduce your monthly expenses

There are a number of things you can do to reduce your monthly expenses. As scary as it sounds, learning to be a little more frugal can be really helpful. This requires you to change your spending behaviour and will have a positive long-term impact on your financial health!

  • You can start by learning to say ‘NO’. This will be hard, but curbing impulse buying will be extremely important if you are going to get back on your feet.
  • Try cutting out a credit-card sized piece of paper and sticking it to your credit card with a little note encouraging you not to use it. Start using cash instead of your credit card (it’s a lot harder to hand out the cash than the card).
  • Look at other ways you can save such as eating in, taking your lunch to work, reducing how often you buy a coffee and cancelling memberships that are not essential.
  • Start looking for free things to do on the weekend, get your exercise for free outdoors
  • Cut out or reduce your expensive hobbies
  • Join your local library. You can loan books and DVDs for free.

4. Create your ‘Get out of debt’ plan

Once you know what your debt situation looks like, and you’ve created a budget that shows how much money you can contribute towards paying your debts off, you can create a plan to get back on your feet.

You need to use the information from step one and two to help you set debt repayment goals. Calculate roughly how long it will take to pay off your debts by looking at how much you can contribute towards them each month. Set yourself goals, for example, your first goal could be to pay off the full amount in three years. Next set periodic goals, such as paying off a third of the debt in year one.

Seek out free financial advice

If you are feeling overwhelmed and it all feels too hard, seek out free financial advice. There is a range of free financial services available which can help you through this process. A financial counsellor can help you review different way to get out debt, including identifying the available alternatives such as debt negotiations, informal or formal debt agreementsdebt consolidation and more. Debt Negotiators offers free financial advice and can help you create a debt management plan to help you get out of debt and stay out of debt.

5. Plan your repayments

Having a goal is one thing, knowing how you are going to reach that goal is imperative if you are going to succeed! You’ll need to make sure you pay the minimum repayment on your debts. Then to start reducing your debts, you need to prioritise how you going to pay them off faster. There are a few ways you can look at tackling your debts:

  • Consider consolidating your debts
    Debt Consolidation Loan could enable you to make one affordable monthly payment at a lower interest rate for a period of time, simplifying your situation and making it more achievable.
  • Pay off your debts based on their size
    Another option is to order your debts from the smallest to the largest amount owed. Pay a little extra into the smallest debt each month. Once it’s been paid off, you can pay extra to the next one on the list. Paying off a debt will give you a sense of achievement and help incentivise you to stick to your plan.
  • Pay off your debts based on the interest rate
    List your debts based on the interest rates. List the one with the highest interest rate first and then list the rest in descending order of interest rates. By paying off the one with the highest interest rate first, you will be freeing more money over time.

Remember, every debt you pay off will free up more money to pay towards the next one. Just as important, remember to make your repayments on time. Late fees could be adding to your burden.

6. Track your progress and make adjustments

Your debt repayment plan won’t be set and forget. You need to keep your debt list up to date and track your behaviour closely to make sure you’re making progress. If necessary, make adjustments to the plan. You’ll need to stick to the plan until all your debts have been paid off.

7. Don’t take on any more debt

This step is really important. If you want to get out of debt, you have to stop borrowing money or using credit. You’ll need to change your spending behaviour.

To do this you’ll need to make a conscious decision to only spend money you already have. No more furniture, no new credit cards and no new gadgets. Put away your existing credit cards and pretend you don’t have any. If you need to pay for things online, consider getting a debit credit card. This works exactly the same as a credit card, simply without the credit – you can only spend the money that is in your bank account already. Focus on the debts first. Once they’ve been paid off you can look at saving up for new things you’d really like.

8. Reduce your interest rates

If at all possible, look at ways to reduce your interest rates. There are a number of ways you can do this.

  • Talk to your lenders and see if they’ll be willing to negotiate a lower interest rate.
  • Consider consolidating all your debts through a Debt Consolidation Loan with a single monthly payment and a lower interest rate.
  • Consider consolidating your credit card debt. Contact your bank and see if you can transfer your credit card balances into a single credit card at a lower interest rate.
  • Investigate refinancing your home loan and consolidating your debts into that.

9. Consider how you can generate more income

One of the best ways you can look at to pay off your debts faster is to find ways to generate more income. This may mean taking out a second job, or if you can, working longer hours or taking on additional shifts. You think you don’t have time? look at all the time you spend shopping, socialising or going to the gym. You can use that time to help you get out of debt faster!

Ask for a raise. The worst that can happen is they’ll say no. Look at selling the stuff gathering dust in your home or garage. You can run a garage sale or sell them online. If you receive a tax rebate or win some money, put that towards paying off your debts as well.

10. Create an emergency fund

It might seem crazy to talk about starting to save money while every penny is going into your debts, but as we all know things happen. You can get unexpected car issues, medical bills or pet illnesses. These can be a drain on your budget. Being prepared is the best way to protect yourself if an unexpected expense comes knocking.

We’re not telling you to put away all you’ve got. We’re suggesting you start small. Plan to put away 5% of everything you earn or take advantage of automated savings options such as INGs Everyday round-up, which rounds your debit card payments up to the nearest dollar (or five) and automatically pops that into your savings account. Start small, and just keep that savings account growing. Next time you have an unexpected expense, you’ll have some funds ready to help pay for it.

11. Keep an eye on your credit report

Your credit report is a record of your financial behaviour and can impact whether you can get a loan and what type of interest rates you might be offered. Your credit report can help you see your progress towards getting out of debt. It’s also a good idea to make sure your credit report is correct. It’s not unheard of to have incorrect information on a credit report, negatively affecting your credit rating or score. Take steps to repair your credit report if needed. Review your credit report to make sure the information is accurate and that there are no duplicate records or erroneous defaults.

12. Get help

If you are still overwhelmed by your debt, or simply cannot get yourself to a situation where you are paying off more than just the interest, get help! There are a number of options available to help you get back on your feet financially. Start by seeking out free financial advice to plan and identify what your options are.

Debt Negotiators offers a range of services to help you get out of debt, starting with an impartial, free financial assessment. From here we can help you create your budget and debt management plan. Our services include:

Why Choose Debt Negotiators

Debt Negotiators has a friendly expert team experienced in helping people just like you find workable solutions to their overwhelming debt situation. Together we’ll review your individual circumstances and help you create a debt recovery plan to help you get out of debt and stay out.

Debt Negotiators offers you:

  • Independent professional consultation

  • Support throughout Australia

  • Individual solutions based on your financial situation.

Talk to Us Today

Our friendly team are available, no matter where you live in Australia, and they’re ready to help you identify the best way to manage your current financial situation so that you can avoid bankruptcy, even if you have a bad credit rating.

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