Saving for a deposit is not easy as it is, but how about when you have existing debt standing in between you and your financial goals? Struggling with debt is a common problem for Australians: a review by the Australian Securities & Investments Commission revealed that one in six Australian consumers is grappling with credit card debt.
In addition to making it harder to qualify for a home loan, debt can have a negative effect on an individual’s physical and mental well-being. While it can feel overwhelming to deal with, it might be possible to pay off your debt sooner than you think. The rewards are worth it, as being debt-free will improve your standing remarkably when it comes to getting a mortgage.
Here are 5 strategies that actually work to reduce your existing debt:
1. Stop Adding More Debt
Sure, this won’t help you get out of your existing debt, but it is essential to paving your way to a debt-free future. Adding on debt halts any progress that is made and can be very demoralising, whereas reducing debt will feel empowering as you regain control. You might want to consider getting rid of your credit cards. It is also a good idea to put together a small emergency fund ($1000-2000 for example) to fall back on. This way, you won’t have to rely on more credit if an emergency comes up!
2. Create a debt payoff plan
Now you might have one or multiple sources of debt. While making the minimum payments to each account, there are a couple of different strategies you might want to consider.
- Debt Avalanche: Start with the debt that has the highest interest rate and work your way down to the one with the lowest interest rate. With this strategy, you will save money by paying less in interest. This strategy requires some persistency, as it might take a while to get the first debt ticked off your list.
- Debt Snowball: Put all extra money towards the smallest debt, building your way up to the one with the largest balance. The reason people like to do this is because the sense of achievement when you pay off a debt entirely is unmatched. There is no doubt mental well-being is improved enormously when there is one less account to think about. Getting the taste of a small win at the start is great for staying motivated too!
In addition to this, some people prefer to pay off the debt that has the biggest emotional impact on them first. For example, they might prioritise paying off debt to parents or friends. Select your approach based on your own priorities and situation, then stick to your plan!
3. Include Debt Payments in Your Budget
Paying off debt is no fun, so it is easiest to establish some rules to adhere to consistently. Although your debt is not urgent in the same way as rent or utilities, try to think of it in the same way. Treat your debt like a bill and budgeting a manageable amount for it every month. If you leave it to the end of the week or month to put what’s left of towards your debt, you might find yourself hard-pressed to come up with much.
4. Create a Zero-Sum Budget
You’ve probably heard this a million times, but a good budget must be doable. What you might not have heard of is a zero-sum budget. A zero-sum budget stands for budgeting ALL the money you make towards something, including your debt and the occasional splurge. Many people make the mistake of budgeting nothing for the fun things in life, which is not a way to live in the long run. Another mistake is to just spend uncontrollably on food, drinks and new stuff when you have extra cash. It makes more sense to put a small amount of money aside every week for splurging, then treat yourself strictly within that. We guarantee it feels even better to splurge when it’s in your budget and earnt!
5. Track Your Spending
We know – this is another one of those tips that gets repeated time and time again yet is so difficult to keep doing. Well, it used to be! The digital age has brought about so many new tools to regain control of our finances. Spending tracking apps are a real godsend to those of us who find our extra cash trickling away to barista coffees, nights out and buying new clothes out of boredom. ASIC has built a free app called TrackMySPEND, but there are multiple other alternatives available as well.
Paying Off Debt Improves Your Credit Score
Debt is an important component of your financial situation overall. It directly impacts your credit score and consequently your ability to get a loan. It is worth it to put together a plan for paying off at least some of your existing debt, as it will make you appeal more trustworthy and stable in the eyes of lenders.
Sadly, we often hear from our customers that their debt makes them feel completely defeated when it comes to buying a house. Sure, it is an uphill journey to first pay off debt and then try to save up a 20% deposit.
Our low deposit program is designed to help home buyers who may struggle in gathering a full deposit together or may need that additional top up. Depending on your situation, you may qualify for a deposit boost through our financial programs. Contact one of our consultants today to find out if we can help you speed track your way to homeownership!