It’s never been easier to spend up big on credit.
Forget handing over plastic at the store, revolutions like Amazon’s one-click-to-buy means it doesn’t even feel like you’re spending money.
A little here, a little there, that shirt, tickets to the movies, a last-minute present for a friend (a dozen cheap kindle books) and next month’s credit statement is like a slap in the face with a wet fish.
How did I spend that much?!
Those little amounts can add up quickly. Suddenly, the ghost of your spending future is kicking the ghost of your spending past.
The good news is, with a few key strategies, you can eliminate debt, build your savings and become debt free for good.
Disclaimer: This is general information only. You should always consult a qualified financial expert when making money decisions.
There are many options for paying off debt, below is just one – speak to a financial expert to find the right option for your circumstances.
The 7 Steps to Becoming Debt Free and Staying Out of Debt for Good
Becoming debt free is a journey that starts with these 7 steps in the right direction.
1. Build Your Savings
It seems counter intuitive to build savings when you have debt. After all, shouldn’t you throw as much money at your debt as possible to reduce it as quickly as possible? Doesn’t that save you money on interest?
The problem is, next time a bill comes in or your car needs repairing or the kids have a school excursion, how will you pay for them if you have no savings?
The secret to staying out of debt in the long term is to build your savings so you can break the cycle of relying on debt. This is why I start a savings plan before a debt reduction plan.
2. See Your Debt
It’s easy to ignore debt. That niggling feeling in your mind that you should tackle your credit card is soothed by the voice that reassures you that you’ll check it tomorrow, followed by the honey slick voice that whispers you’re in this far, what’s it matter if you spend a little extra.
To tackle debt, you need to lay it all out on the table. Take a piece of paper and write down each of your debts, the balance, the interest rate and the minimum monthly repayment.Then add it all up.
It’s important to look at the total amount.
Multiple debts can give you a false sense of security. By only seeing each balance separately you can convince yourself that you don’t owe that much and it’s all under control. Adding up the total puts debts into true perspective.
3. Snowball Your Debt
One way to tackle debt if you have multiple credit cards and loans is to use the snowball method.
You can read more about the snowball method here, but in short, you pay the minimum monthly repayment on all debts except one. On that one, you pay extra to pay it off quicker. When you have paid off that first debt, you apply the whole payment towards the next debt and so on so that your repayments snowball.
4. Schedule Your Payments
Don’t wait for the statement to come in before you start paying off debt. Take control and schedule your payments to come out automatically each payday. This makes debt repayments easier and it helps chip away at the interest.
And while you’re scheduling, automate your savings as well.
The mistake that most of us make is we spend first and save what’s left…if there’s anything left.
The most powerful financial decision you can make is to pay yourself first automatically using online banking.
Schedule your savings and your debt repayments to come out automatically every payday, before you have a chance to spend anything
By automating the process, you don’t even have to think about it, you get on with living while your savings build and your debt reduces.
5. Spend with Cash
It’s a simple truth that you can’t get into debt if you don’t have access to it.
That doesn’t mean you have to cut up your cards or carry wads of cash around, it simply means spend your own money, not the banks.
That’s why step one – to build savings – is so crucial. In order spend cash, you need to have some in the first place.
What about building a credit score or making the most of points? Is all that out the window if you only use cash?
If you have the discipline, you can still use a credit card and spend with cash at the same time by only buying something if you know you can pay off your credit card straight away and still have money leftover to pay upcoming bills.
If you find plastic just too tempting to have in your wallet, then the perks aren’t worth it. Spend with real cash and watch your finances improve in leaps and bounds.
6. Simplify Your Life
The secret of happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less.” Socrates.
Take a look at your credit card statement, specifically what you spent your money on. How much of it do your really need?
We don’t need bigger houses, better cars, more toys for the kids, new tech, the latest look from Vogue or Home Beautiful.
None of it gives us lasting happiness.
Real fulfilment in life generally comes free. Simplifying not only saves money, it can make you happier.
Looking for something to do? Rather than going to the shops, visit a park, take a walk on the beach, browse at your local library, cook real food from scratch, learn to draw, visit a friend.
There are hundreds of ways we can live a full life that don’t include spending a lot of money.
Fast track your debt repayments by cutting expenses and increasing your automatic debt repayments. Once your debts have gone, you’ll have all this spare cash to save or spend as you wish.
7. Sell Your Clutter
Want to supercharge your debt repayment? Don’t do it by sacrificing your savings, do it by selling all the stuff in your house you no longer use and put the cash towards your debts.
Throwing all your money at your debt and hoping for the best is not a strategy that will work long term if you don’t also change your spending and saving habits.
Changing your spending habits will help you avoid debt now and in the future.