Ditch the debt

by Jayde Jenkins

This blog post will refer to bad debt, high interest type debt such as credit card, buy-now, pay-later schemes, pay day loans, personal and car loans. 

Not all debt is bad, take for example investment loans, which help boost your ability to generate growth on those investments. Or a home loan, which will put a secure roof over your head without the risk of being asked to move on by the landlord. However, sometimes we can find ourselves in more debt than we would like. Some of it from emergencies, sometimes to make ends meet, and sometimes because we just really needed that designer handbag… 

You will often hear me speak about people who are 20-40s (roughly) having been set up to fail. In primary school most people joined the banking scheme (I won’t mention any banks here), but if you went to school in Australia, you would know what I mean. What we didn’t realise at the time was by opening that bank account, we became a customer on their data base, and back in the early 2000s it was legal for the bank to send you a credit card you never asked for. That bank was playing the long game, by having us as customers as kids, when we turned 18 they celebrated by sending us a credit card in the mail. Fast forward to 2009 with the rise of social media and the added social pressures that came home with us from the school yard. In 2014 the first buy-now-pay-later scheme was founded and increased personal spending and debt massively. 

To me, this is a perfect storm, being set up to fail having such access into personal lives of others, and the resources (borrowed resources) to fund the purchases we see influencers flaunting online. We’ve never been taught how to handle the desire for instant gratification we get from seeing something we want and being able to buy-now-pay-later. Nor have we been taught how to get ourselves out of the debt it can lead to.

Unfortunately, there has been limited financial literacy taught to many of us growing up. Habits are ingrained in us, social media puts pressure on us for a luxury lifestyle, and pay-now, pay-later schemes help us fund exactly that. 

Spending money is more about us, our psyche telling us we “need” something and comparing ourselves to others than it is something we really want to do. Habits and beliefs need to change to make sustainable actionable steps to unwind all of this, a lot of willpower is also needed to walk away from something we really want, but don’t really need. Working on your money values and money story is a good way to start to unwind all of this and understand your own spending habits.

However, if you’re reading this you’re probably here because you want help with your debt, not a psychology class. I’ll spare you the life lecture and get straight to the point. How the heck do you unwind this debt.

A memorable client I had a few years back, had managed to get herself and husband into $100,000 credit card debt. Now that interest rate was around 22%, which means one year that debt alone was costing $22,000, about $423 a week just going to credit card debt interest, not to mention then the actual debt on top of that. In front of me she emptied her 6 credit cards from her wallet and we slowly cut up 3 of them (baby steps), we came up with a plan of attack, but it wasn’t something that was going to get better overnight. 

If you’re finding yourself in debt, wondering how to get out of it, here are some actionable steps to consider. 

1. Mindset - Own up to that debt, going forward you’re not reaching for the credit card, and you will not be paying it later. 
2. Close down those buy-now, pay-later accounts.
3. If you don’t have one, make a budget and work out how much extra per week you are going to contribute to paying down your debt.
4. Chose your method, snowball or avalanche (explained below).
5. Get cracking on that debt! 

Ways to pay down debt:

DEBT AVALANCHE 

1. List your debt from the smallest interest rate, to the highest.
2. Make the minimum payment on all debt except the one with the highest interest rate (you can find your minimum payments on your loan or account statement).
3. Pay as much as possible off the one with the highest interest rate.
4. Once this is paid for, move on to the one with the next highest interest rate.

This method will technically mean you pay less interest over time, however can feel like it is taking a while to notice any difference if the highest interest rate is on a large debt. If you’re someone who likes to see results faster you can try the snowball method.

DEBT SNOWBALL 

1. List your debt from the smallest in value, to the highest.
2. Make the minimum payment on all but the one with the smallest debt.
3. Pay as much as possible off the one with the smallest debt. 
4. Once the smallest is paid for, move on to the next smallest. 

By paying your debt off from smallest to largest, you aren’t necessarily going to save the most amount of interest, but, you will make progress quite quickly which may help motivate you to move to the next.

Jayde Jenkins is an Authorised Representative 001002540, and Blossom Wealth Pty Ltd, trading as Bloom Financial Planning, is a Corporate Authorised Representative (No. 001307640) of Spark Advisors Australia Pty Ltd ABN 34 122 486 935 AFSL 380552.

The information in this blog and the links has been prepared for general information purposes only and does not take into account your personal objectives, financial situation or needs. It is not intended to provide commercial, financial, investment, accounting, tax or legal advice. You should, before you make any decision regarding any information, strategies, or products mentioned in this blog, consult a professional financial advisor to consider whether it is suitable and appropriate for you and your personal needs and circumstances. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product, together with the Target Market Determination (TMD).