Get a handle on debt in 2013
WELCOME to 2013 - a new year and the opportunity to make a fresh start. Chances are you made a resolution or two for the year ahead, and for plenty of Australians 'getting out of debt' topped the list of goals for 2013. We often make these resolutions in a spirit of bonhomie but with the right approach and a bit of work, it is possible to become and remain debt free - and the rewards are tremendous.
Debt problems plague many Australians thanks to a range of factors including easy access to credit cards and a tendency to spend more than we earn. As a nation, our ratio of household debt to disposable income has almost quadrupled over the last 30 years. We also owe around $49 billion on credit cards, not a pretty picture.
The thing is, it's not debt itself that is good or bad but rather the way we use it.
Like most people, without having taken on some debt, I doubt that I would own a house, a business and some assets, which will help me enjoy a comfortable retirement. It's when we use debt to make purchases or no lasting value or to spend beyond our means that debt can become a real problem.
A key starting point in getting control of debt is to know exactly what you owe. You'd be surprised how many people don't have a firm rein on their credit card balance or home loan. Next, add up your monthly repayments and take a look at your budget to see if you could add a bit more to your credit card or mortgage repayments each month. It's the single most effective way to pay off debt sooner.
If you're constantly stretching your cash from one pay day to the next it's time to draw up a personal spending budget. This will show how much you can afford to spend each week, fortnight or month once regular bills have been paid. Your budget will also highlight any spare cash you can use to make extra repayments on your outstanding debt.
It's also important to check that you're getting the best possible deal on your debts. Comparison websites like RateCity or Mozo can help you decide if you could save by switching to a cheaper credit card or home loan. Refinancing can lower your monthly repayments and using the savings to pay off your debt faster will see you save a bundle in overall interest charges.
Finally, think about adopting a new mindset - one that moves away from the 'have it all now' approach that I see used to flog anything from jewellery and cars to home furnishings. Saving up for the things you want, and aiming to pay with cash wherever possible forces us to think twice before making impulse buys. It also means you won't add hidden interest charges to the cost of your purchases.
Becoming debt free or at least minimising the amount of debt you have in your life is definitely something worth aiming for.
For some straightforward strategies that will help you clear your debt sooner, take a look at my new book 'Free Yourself from Debt'.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.