The road to financial freedom is a rough path. You might have a hard time meeting your income with today’s responsibilities. Or you might have suddenly lost expected cash flow from retrenchment.
For most people, it might not be as dramatic. It’s just that we have one pothole that we dug ourselves into. That is DEBT. (No wonder it sounds like Death).
And according to the Reserve Bank of Australia, it’s happening across Australia. Most Australian households incurred debt equal to 190% of their yearly disposable income.
It may be a combination of good debt or bad debt. But then, for an average worker, this implies that you are paying roughly $160,000 AUD a year in debt for a yearly salary of $80,000 AUD. That’s being buried financially by almost double your yearly income every single year.
If it was a financial obligation from cash flow positive investments, it may be manageable. But what if it’s accumulated debt from those impulse buys? What do we do if we are continuously buried to our financial grave? How do we finally get out of this cycle of debt?
Face the Beast, How Much Do You Really Owe?
The problem with debt is people don’t realize that they are trapped until it’s too late. We see the accumulation of debt as normal. I mean, all people have debt anyway, why not have one for ourselves? Wrong.
It’s like saying that most people are smoking, why not do it anyway? But the real question is: is it going to be good for you? Realize that bad debt is detrimental to your future financial well-being.
But upon realization, most people are scared to face how much their obligations are. To defeat this cycle, we must face the problem head-on. We must face the beast. How much do you really owe?
The first step is awareness. Anything not measured, cannot be improved. Sum up all your financial obligations. Credit card loans, student loans, personal loans, etc.
Hit that equal button. This may be an overwhelming amount. But know that it’s possible to get out of it. A lot of people have done it. We just have to know how they did it.
It’s Time to Learn Budgeting
After facing the beast, we must strategize to eliminate this monster. Unfortunately, budgeting is the first step. It may be a boring topic, but we have to create this system to get us out of the cycle forever.
Becoming rich is a habit, and creating this system pushes us the habits of proper money management. I have talked about this extensively in the ultimate guide for budgeting, investing, and retirement as a freelancer. Read this first before you continue.
But whether you are a freelancer or not, creating a budget is essential. You have to know:
It all starts with analyzing your spending. Classify what and where are you spending most of the time. Sometimes, preventing yourself to pass that local store (where you’re most likely going to spend) blocks you from spending more.
After this, you have to create a budget to tailor fit your needs today. This may be 40% Necessities/ 30% Discretionary Spending/ 30% Savings/Retirement/Debt Repayment. Or 60/20/20. There is no standard figure. The proportionate budget should depend on your spending analysis.
You have to set up a system to ultimately pay off your debt while not feeling too deprived. Striking this balance will allow you to muster the strength to push through the plan.
Now that you have created a working budget, how do you pay off your debt? With having multiple debts, it is best to focus on one debt first and then still pay the minimum for the other debts. (Note: you still have to pay the minimum for your other debts.)
There are two methods to go about this. Either the Stack Method or the Snowball Method.
The Stack Method allows you to rank your debt from the highest interest rate to the lowest. And then, you apply more cash on the debt with the highest interest rate thereafter. This allows you to save from higher interest charges in the long run.
You can target to pay twice the minimum amount of the highest debt. This significantly reduces the time you pay the debt by at least half.
After paying off the first debt completely, you apply the amount you were paying on the previous debt plus the minimum payment to the second debt.
On the other hand, the Snowball Method ranks the debts by the AMOUNT. Now, you focus more on the lowest amount of debt first while paying the minimum on the other debts. It creates a snowball effect after by combining your total amount of payment from the previous debts applied to the current debt.
This method capitalizes on our motivation. You will feel instant gratification while you slash off one debt as soon as possible.
There is no right or wrong method. I suggest choose the method that works for you.
Get Rid of Your Past Mindset and Material Things You Don’t Need
These methods are easier said than done. You might be stricken with an extreme case. By this time, you should’ve foregone lifestyle inflation and stopped creating new debt.
Keeping up with your neighbors should be forgotten. You have to get it off your system. For what it’s worth, most likely, they are broke too.
This is the time to get rid of the things don’t need. Cancel those gym memberships. Find ways to reduce your expenses. Some reevaluated their insurance policies and transferred to lower cost, but similar, ones. Other people go to the extreme and literally froze their credit cards in blocks of ice until it’s paid off.
By getting rid of items you don’t need, you might even get enough cash to use for your debt. Not using your Barong or Tuxedo? Sell it. Just borrow from a friend or rent for those special occasions.
Have a super expensive car for your financial standing? Sell it and downgrade. It’s better to drive a less prestigious car debt-free than having a luxury car without the ability to gas it up. If your office is relatively near, you can even forego the car for a bike.
Get Additional Leeway
It is not bad to try to get leeway. If you have personal loans, try to negotiate with your lenders. Explain your situation, and propose a payment plan you can stick on. You will be surprised that some are willing. Just make sure you really have the intention to be debt-free.
You can also use a balance transfer transaction to your other cards. This will effectively reduce the interest you will pay over time. Again, make sure this is not an excuse to use more debt. You will be stuck in the cycle if don’t use this sparingly.
Lastly, you can set up an emergency fund amounting to one month your monthly expenses. This leeway grants you safety when that unexpected expense happens. This gives you reserve money to pay that new obligation and not resort back to debt.
Take on Side Gigs
Even with all your efforts, it seems you can’t reduce your debts. But don’t jump ship yet. You have fixed bulk of the problem with budgeting. Now, you have to think of ways to get additional income.
With today’s freelancing trend, everyone can jump in a side gig. Even if you don’t have the skills yet, there are a lot of online resources to get you started. Almost everyone started with no skills. You can even learn this practical and highly in demand remote working skills after work.
Any extra money you get from here, apply it to your debt. With more cash rolling in, and after making sure you live well below your means, it’s just time before you are completely debt free.
Facing this Beast is surely daunting. But with these steps, and with the testimonies of countless that have done it, I’m pretty sure you can do it as well.
Cheers to your financial journey!