Tammy Barton is the director and founder of MyBudget. Here, she explains how Australians can find the best debt strategy for their personalities.
The new financial year is here, but for many Australians it’s nothing but an unpleasant reminder of their debt and money worries. If this is you, you are not alone.
A recent MyBudget survey found Australians today are living with greater financial and life stress compared to 20 years ago. The research revealed that four out of five Australians are stressed about financial commitments, with 85 per cent saying life is more expensive and 75 per cent saying life in general is more stressful than it was 20 years ago.
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More Australians in 2019 have a credit card (53 per cent) than a superannuation account (50 per cent).
If there’s one thing I’ve learned from two decades of helping people overcome financial stress, it’s that money problems can be turned around quickly. MyBudget recently helped a young Sydney couple with average combined salaries to pay off five credit cards in 10 months – over $60,000.
They are now saving for a house and living a life they wouldn’t have dreamed possible 12 months ago.
The biggest problem stopping people from paying off debt is having a realistic plan that works for them. Money is more than numbers; it comes wrapped in a myriad of emotions and is tied up with notions of power (or powerlessness, depending on the situation).
Start by identifying which debt strategy resonates with your personality, values and attitudes toward money. This might take some soul searching. Are you impulsive? A control freak? A worry wart?
It takes courage to be honest with yourself about how you got into debt in the first place, but it’s an important step, because a strategy that’s good in theory may not align with your likely behaviour. A workable plan can be the difference between years of struggle and tens of thousands of dollars.
The Big Hitter Debt Strategy
Logically, the quickest way to reduce your debt is to pay down the most expensive debts first. These are the loan balances that attract the highest rates of interest. Credit cards are likely targets, as are store cards, revolving lines of credit and quick cash loans.
The Big Hitter Strategy focuses all spare cash after expenses and minimum repayments on paying down the debt that has the highest rate of interest. Once that debt is paid off, focus on the next most expensive debt and so on.
This strategy is great for debt reduction because it minimises the amount of interest you pay overall. The challenge of the Big Hitter approach is that it can take a long time to feel like you’re making any progress, especially if your balance is sizeable.
However, you’re motivated by logic and long-term goals and have the fortitude to stay on track, go with this approach. If you have an impatient personality, steer clear as you probably won’t see the plan through.
The Snowball Debt Strategy
Sometimes it pays to focus on smaller debts first, even when they aren’t the most expensive ones. The Snowball Strategy is talked about a lot these days.
It focuses on putting your spare cash (after expenses and minimum repayments) toward paying off your smallest debt first, regardless of the rate of interest it attracts. When that debt is paid off, you move to the next biggest debt, and so on.
The Snowball Strategy gets its name because it gathers momentum as smaller debts are paid off and the repayments are applied to larger debts. Along the way, you get to cut up credit cards, close accounts and celebrate mini milestones.
If you’re a methodical personal who likes ticking boxes and thrives on continuous and visible progress, this strategy is for you. This is also a great strategy if you tend to be easily waylaid, as the plan keeps you engaged and enthused.
The Feel Good Strategy
An often-overlooked factor in debt reduction is how your debts make you feel. Financial stress is one of the leading causes of relationship tension and divorce.
Sometimes the best debt strategy is to focus on paying off the debts that make you feel the worst. For instance, the debt might be $1000 you owe your grandmother or a credit contract on a phone you lost six months ago.
The Feel Good Strategy channels your spare cash into the debt that will make you feel the best when it’s gone. When that’s paid off, you move to the next debt that will make you feel the best, and so on.
This can be an excellent way to rebuild stressed relationships and feel better about yourself in general. If you’re an anxious or worrying person, or you have a ‘nasty’ debt that’s impacting your wellbeing, this is a good strategy to get your heart and head in a better place.
The Outsourcer Strategy
If you’re still lacking motivation, are time poor or feel too overwhelmed to come up with a plan yourself, getting professional support to pay off debt is necessary. MyBudget works with clients to identify which of the above debt reduction strategies best suits their situation and does the heavy lifting to keep clients on track.
This is what worked for Sydney couple, Megan and Creagh. If you love outsourced services, hate the idea of budgeting or you’ve developed such a negative relationship with money that you don’t feel confident addressing your problems alone, this hand-holding approach can be life changing.
Remember, these strategies are a guide and you might consider using more than one. For example, the Feel Good Strategy is a great kick-starter to wipe out a particularly troublesome debt and curb your anxiety, but you might tackle your remaining debts with the Snowball Strategy to keep up the momentum and satisfy your inner list-maker.
If you’re currently in debt – even serious debt - know that by June 30 next year that sense of dread could be gone, simply by knowing yourself and finding the right debt strategy to match.
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