Have you ever felt like you are drowning in debt? That money is constantly going out the door and there is no way of getting ahead? You’re not alone. In fact many people are experiencing this feeling on a daily basis including those you least expect.
So how do you begin to break free from what feels like an endless cycle of debt and interest? While there are no quick and easy fixes, there are some small changes you can start making today that will make a huge difference to your financial future. Here are six tips to help you break free from debt and take back control of your finances.
Understand your spending habits
If you cut yourself, you don’t just leave it and hope for the best. You make sure you deal with the source of the blood loss. It’s the same with your finances. Things won’t magically change unless you address the underlying reasons that got you in the cycle of debt in the first place.
When it comes to money, often the best place to start, is with your attitude towards it. Are you a “buy now, pay later” person? Do you buy to feel better? Do you catch yourself saying “go on…buy it, you deserve it”? Do you buy to belong?
These questions are designed to help you identify some of your values around money and what might not be working. When you can understand the motives behind your spending habits, you can make wiser financial decisions and become more aware of the unproductive habits that are sabotaging you from getting ahead.
Decide to change
To break bad financial habits and escape the debt cycle you – and your partner – need to be committed to change. While acknowledging that things need to be different is an essential step to implementing change, unless you and your partner are both committed to taking actions – or not taking actions – you will never escape.
For this reason it’s important to have a ‘why’ that is stronger than any temptation that may come along. For example, if owning your own home is more important to you than purchasing the latest devices, going on big holidays and eating out, then you have a big enough ‘why’.
When you’ve found your goal take it one step further. Write down everything you will love about achieving it. Also write everything you hate about being in debt and what it is robbing you of now. You’ll soon realise the decision is not a hard one to make and you’ll have an extra dose of motivation to keep you on track.
Live within your means
While this seems obvious, one of the biggest causes of debt comes from a desire to impress others and to be perceived as “having it all”. This can often mean creating a lifestyle that is well above your pay check and going into serious debt to fund the big house, nice car, enviable holidays and expensive hobbies.
What’s worse is we often do this to impress people that we don’t like or who aren’t real friends! But there is no faster way to unravel your finances.
To be able to escape the debt cycle you need to stop creating debt and live on your own money. Make no mistake this takes sacrifice, patience and self-control, but it certainly beats the stress of accumulating more debt.
Pay off the debt with the highest interest rate first
Interest is what can create a snowballing effect with your debt and leave you feeling like there is no way out. It compounds, and in some cases, the minimum payment is only paying the interest, it doesn’t even begin to pay off the loan. So that bargain you found that you put on your credit card, may not be the bargain you really thought it was if you can’t pay it off in time.
To start getting your debt down it is vital to tackle the debt that has the highest interest rate charge first, and not make the common mistake of paying off the smallest debt first. While the latter can feel like a quick win, more interest will accumulate in this time. Taking a focused approach to paying down the debt with the highest interest rate each time will see you break free from the debt cycle faster.
Consider consolidating your debts
If you have many debts, for example, a car loan, personal loan, several credit cards, and a mortgage, then it might be worth you looking into consolidating your debt into one larger debt that has a lower interest rate.
It’s important to make this decision in consultation with a financial advisor or an accredited finance broker who will be able to explain the pros and cons of consolidating your debt. While it can be appealing to have one payment, this isn’t the best option for everyone.
Get addicted to saving
The truth is saving can be just as emotive as spending; the only difference is that it works for you, not against you. In the same way interest compounds on debt, interest can also compound on your savings – and it can be exciting to watch!
If you haven’t been much of a saver, start small to get into the habit. Here at MoneySmith, we recommend setting your savings up as a direct debit, so it comes out of your bank account automatically. This way you don’t even notice it’s gone and you know you have regular savings happening. As you reach certain milestones, look into different ways to invest your money to get it working even harder for you.
As you watch your money grow, you will find, like so many others, that you catch the savings bug. This makes you even more mindful of your purchase decisions and motivated to find more money to save.