Debt Reduction Strategies – Become Free of Debt
Last week we touched on debt stress and the various effects it can have on the household, namely how to use the equity in your home to consolidate, aiming to become free of debt (bad debt) and relieve said stress.
Maybe you’re thinking – ‘that’s a great idea, but we don’t have any equity yet’. “Luckily, in today’s modern society, there are apps that will make this process a lot easier and do all the calculations for you.”
This week we want to discuss some other options outside using the equity in your property that can help to ease the pressure. Debt Snowballing Termed ‘Snowballing’ due to the similar characteristics of an actual snowball – packing tiny bits of snow together to make one large snowball, and the snowball then rolling along, getting larger and larger as it picks up more snow (debt).
You can apply a similar approach to credit cards and personal loans. Essentially, it looks like this:
Step 1: List all your debts from smallest to largest
Step 2: Make the minimum required repayment on all debts EXCEPT the smallest one
Step 3: Repay as much as you possibly can off the smallest debt – until it is completely cleared
Step 4: Repeat the process until they are all paid in full. Luckily, in today’s modern society, there are apps that will make this process a lot easier and do all the calculations for you. Simply type ‘debt snowball’ or “free of debt” into the app store, and apps such as ‘Debt Free’, ‘Debt Snowball Pro’ or ‘Debts Break’ will appear by the dozen. Pop your debts in, your minimum repayments on each, and how much extra you can afford each month and we promise it will make you smile – which is the precise reason this method works so well.
It’s more about behaviour modification than hard figures – changing the way you look at paying the debts and showing you how quickly you can do it by simply budgeting better and having great discipline. This is a DLS favourite for debt management.
Consolidate with one large personal loan
Perhaps you don’t have any equity, or maybe you don’t want to use your equity, but you can still consolidate using a personal loan. The rate will be higher than a home loan rate, however, it will probably still come in under a credit card rate, and it rolls everything into one neat repayment. In most cases, a personal loan can be locked in at a fixed rate so you can benefit from the peace of mind knowing your repayments won’t change with interest rate rises.
Ok. This one isn’t our preference here at DLS, however, It can work for a select audience. We are certain you have all seen the pretty advertisements in flashing lights ‘Balance transfer – 0% for 24 months’ – you know the ones. The best advice we can give on this is – Beware. Read the fine print – are there upfront fees? Annual or ongoing fees? Don’t get sucked into the potential traps. Probably our least favourite feature of this strategy is the fact you get a card, with a limit, and you can go spend that money you paid off last month if you so desired – and, well, that’s how you got here in the first place right? Don’t get us wrong, balance transfers can work fabulously, but you must have the utmost discipline, and make sure you read the fine print thoroughly and know exactly what you are getting.
“The best advice we can give on this is – Beware. Read the fine print – are there upfront fees? Annual or ongoing fees?”
There you have it. It’s not all over if you don’t have equity or even a home yet. There are plenty of ways to punch debt in the face and get things back on track financially without using the equity in a property. It will take time, patience & discipline – but we absolutely guarantee it will lift a weight off your shoulders and have you jumping for joy when you reach your goal of becoming free of debt!