Now that everyone is realising that there is more to life than trends, fashions and credit cards, perhaps the old-fashioned budget can make a comeback! Before a life of credit cards, people used to save money in smaller amounts but more regularly for the items they needed or the bills that had to be paid.
The lack of good money management strategies has led to many nations racking up huge amounts of credit card debt. However, now is the time for consumers to change their spending habits, become investors, and become debt free.
Following the aftermath of the 2008 Financial Crisis, this unprecedented low interest rate environment offers many people the opportunity to consolidate debt and start reducing it. The spendthrift habits of the good times throughout 2003-2007 are definitely in the past and with major OECD countries wearing external debts at levels larger than their yearly gross domestic output levels, all sectors of the economy have a responsibility to start taking action.
While governments do what they have to as far as executing fiscal policy plans to restart the economy and businesses put in place cost cutting programs through restructuring, the household sector's contribution to reducing the external debt is to plan out careful budgeting and money management strategies and reduce credit card spending.
It can take time and discipline to change spending habits, but with some guidelines to assist along the way, each household can reposition their finances and be closer in their quest to become debt free.
How to Start Budgeting Good Money Management Habits
1. Write down every single regular expense and its frequency (weekly, monthly, quarterly, yearly, etc). Some examples include rent, utility bills, insurances, petrol, car registration, car breakdown service, minimum monthly debt repayments, groceries and grog.
2. Write down all the irregular expenses that tend to just pop up. Don’t overlook anything - even the occasional $10 kid's birthday present. Every last dollar counts. Count up how many birthday presents and Christmas presents are bought in a year and set a budget for how much can be spent on each one. Set a budget for how much can be spent on going out and other luxuries.
3. Convert all the expenses to one-time frequency. Often it is easier to make this the same frequency as pay day. So if your pay is received monthly, then convert everything to monthly. For a weekly expense, this means multiply it by 52 (number of weeks in a year) then divide it by 12 (months in a year).
4. Add up all the expenses that were calculated in step 3. This is the amount that needs to be saved each pay packet into a separate account so when the bills arrive, there is enough money to pay for them without using the credit card.
5. Hopefully after performing steps 1-4 there is enough money left from each pay packet to put towards the debts. If not, spending will need to be cut back further on groceries, grog, presents and other luxuries in the budget as set in step 2.
If more than the minimum payment is able to be made the time taken to reduce the debt will be greatly reduced. Furthermore, if just a little bit can be saved each pay packet, it can go a long way!
Savings, additional debt reduction payments and other expenditures discussed in step 2 may need to be jiggled until the pay packet can cover everything including at least the minimum payments on the debts to be repaid.
Consolidate Debts
Consider a strategy to consolidate debts to the cheapest possible product. For example, if you have a home loan, the cheapest (but maybe not the easiest) way to consolidate debts is to refinance the home loan to get rid of credit card and personal loan debts. Because it is a secured loan, the interest rate will be cheaper.
Alternatively, shop around for credit cards with 0% interest payable for initial periods or personal loans where the interest rate is cheaper than what is currently being paid on debts. Generally, personal loans will be cheaper than credit cards but as they are unsecured, they may be difficult to obtain if your income is at an insufficient level for debts over $10,000.
If current products are preferable to others on the market and these debts have been held for some time, it may be worthwhile to check the loans for any bank errors. It's surprising how often this can happen and how much money people have saved by having their loans professionally checked.
Finally, good luck with your shopping around for debt consolidation products and remember – stick to your budget. Budgeting and good money management comes with practice and may take some time to master, but will be easier with debt consolidation while interest rates remain low.
Sally Luxton - I have a background in financial markets, specifically futures and options broking but since having children, my passions have embraced ...
