How to Get Debt Free
During tough economic times, many New Zealanders face the burden of debt. If you’re one of these Kiwis overwhelmed by loan repayments, know that you’re not alone; with the right steps, anyone can take charge of their finances and get back on the path to a better financial future.
Whether it’s an overdue credit card, personal loan, medical or utility bill, it’s time to face up to your finances and get debt free once again.
While the idea of debt management may make your heart begin to race, it’s important to bite the bullet and get started on the plan to paying back your debt now. The longer you take to pay off your debt, the more it’ll cost you in the long run.
In this blog post, we discuss the importance of becoming debt free and our top tips to help you get there.
What does it mean to be debt free?
It’s quite surprising the amount of people that don’t know what it’s like to be debt free. As many young adults start a life of independence, they take out student loans to finance their education. They may go on to taking advantage of credit cards to fund their lifestyles, and then a car or mortgage loan once they are in full time employment.
It goes to show that payments are just a way of life - but it doesn’t have to be for everyone. Becoming debt free almost gives you complete financial freedom - or at least, freedom from the weight the debt had. Living without debt allows you to live your life the way you want to live it, with the ability to save up for a future.
Being debt free means limiting the amount of money that may normally get wasted, and making sure you’re only using money for things that matter the most.
Why it's important to be debt free
Believe it or not, there is good debt and bad debt. Good debt can be used as a helpful financial tool, allowing you to do things in life that will improve your finances in the long haul - like buying a house, going to university or starting a business. Bad debt, on the other hand, weighs you down with interest payments, while contributing nothing to increase your income.
This can make you more dependent on borrowing money to get you through the month, which ends up in an endless cycle of debt. The more debt you have, the longer it’ll take you to pay it off; and the longer you take to pay it off, the more you’ll pay.
Having no debt means paying no interest, and no interest means you have the ability to funnel a significant amount into your savings account (that you would normally be putting towards debt).
How to become debt free
Debt may feel like another inevitability - but it doesn’t have to be. Here are our top 8 tips on working towards a debt free life:
Tip 1: Track and analyse finances
Your first step to getting yourself debt free is to start tracking and analysing your spending. If you’re not sure where all of your hard earned money is going, it can be difficult to know where to begin to start making effective financial changes. Start by keeping record of all your financial records; this includes receipts for credit card, cash and debit purchases.
At the end of the month, use these receipts as well as your bank records to spend some time reviewing your spending patterns. This will make it easier to identify any unnecessary purchases you’re making and address them accordingly.
It’s strongly advised that you do not apply for further loans until you’ve paid off your debt,. However, if you find that you have no other choice but to apply for another loan, you should use this personal loan calculator that helps you find the best rates. It’s based on how much you’re wanting to borrow, the duration of the loan and your repayment frequency. This will ensure that you’re getting the best rate that won’t put you in more crippling debt.
Tip 2: Pay off high interest debt first
Getting out of personal debt is hard, especially if you have multiple debts with high interest levels. In order to get your debt down, you should be paying off your high interest debt first. By paying off high interest debts first, it will make the overall debt slightly cheaper in the long run.
Although you’ll be putting most of your effort into paying off the high interest credit card, it’s important to still make the minimum payments to any other cards you may have. This will ensure you avoid any late payment penalties and keep your accounts in good standing.
Tip 3: Start a budgeting plan
Create a budget and payback plan, and then stick to it! Once you have an idea of where your money is going and what expenses you’re paying for, you can create a monthly budget and payback plan to adhere to.
For example, if you earn $2,000 a month, and your life expenses (i.e. such as rent, food, bills etc) are $1,500, you can look to pay off $500 of your personal debt every month. A helpful way to stick to this is to pretend that you really only earn $1,500 a month - that way, it will feel like you’re not really losing anything.
Tip 4: Stop impulse purchases
One of the major factors that lead to financial debt is impulse purchases; it’s one of those discretionary expenses that often gets Kiwis into financial trouble. Impulse purchases include holidays, entertainment, electronics, recreation and other incidentals.
An easy way to encourage this habit is to start leaving home without your credit card. Studies have shown that shoppers spend up to 34% more when buying something with credit cards instead of cash. It’ll also help to prevent those large impulse purchases that can easily be “racked up on the credit card”.
Once you cut out these unnecessary expenses, there is more money left for you to pay off your debt and save.
Tip 5: Sell your stuff
Have a household clear out and sell some of your stuff! Chances are that you own at least a few things that you never use. Selling a few personal items that you no longer use is a great way to make some extra cash to help pay off your debt faster.
Dedicate a day (or a weekend) to go through your belongings and determine what you can and can’t live without. It’s likely that you won’t miss those clothes you no longer fit, the icecream maker you bought and used once or the bicycle that never leaves the garage.
Utilise websites such as TradeMe, Facebook Marketplace and Neighbourly to list your items for sale. You’d be surprised as to how much you can make selling off things you forgot you even had!
Tip 6: Get rid of a luxury item
Try getting rid of one luxury item from your life. While everyone enjoys a treat, whether that be a daily coffee from the cafe or a subscription to your favourite magazine, the cost really does add up over time. For example, your daily delicious caramel that costs $5 per days adds up to over $150 a month. That’s $1,800 a year!
Have a think about one luxury item/treat that you can live without, and get rid of it. It’s just one treat, so you can still enjoy other little things in life. Cutting one treat out of your life can leave you with hundreds of extra dollars per year, which you can then put towards your debt.
Tip 7: Be disciplined
Be disciplined with your finances; avoid taking out or borrowing any more money until you have all of your current debts paid off in full.
If you end up having any leftover money at the end of the month, don’t take this as an opportunity to buy more things! Rather than treating yourself to a new piece of clothing or a night out on the town, put this extra money towards reducing your debt further.
Contributing any extra funds will help you to get debt free faster, and help you to get back to a financial situation that you’re comfortable and happy with.
Tip 8: Debt consolidation
An effective solution that has helped many Kiwis to pay off their debt faster is debt consolidation. Consolidating your debt means to take out a whole new loan and wrap all of your existing debt together, so that you pay it off all at once.
Ideally, you’ll consolidate your debt at a lower interest rate, so that you’re able to get out of debt faster. The new loan tends to be spread over a longer period of time, so that the weekly or monthly payments are smaller and easier for you to handle.
Debt consolidation helps to simplify things, making budgeting easier as there’s only one loan you’ll have to manage.
Are you considering rolling your debt into one? You can find out if you’re better off consolidating your current debt by using this helpful debt consolidation calculator. Be sure to check for any fees involved if you do decide to apply for a debt consolidation loan.
Get started on becoming debt free today
Becoming debt free can be an absolute life changer, and allow you to live more freely and without constantly worrying about finances. By following the above tips, you can get yourself on the right track to becoming debt free in no time!
Just remember, the longer you take to pay off your debt, the more it will cost you in the long run. All it takes is a little motivation, time and commitment - so why not start your plan to get debt free today!