Virtually every individual, family or business nowadays uses credit facilities for managing their finances.
Australians can select form a wide variety of credit products and the most expensive ones are the most easily accessible as a rule of thumb. In this situation, it is fairly easy to get in credit card debt and personal debt. But how can you manage your finances without these valuable modern tools? People in the past did it and you can do it too. The question is how to go about it.
With a personal loan or a credit card, you can have things now and not at some time in the future when you save enough money. However, when you borrow now, you will have less money to spend in the future as you will have to repay the amount which you have borrowed plus interest. If you are left with a smaller disposable income, you may be forced to borrow more in the future. In this case, you can get into a vicious cycle of debt.
Borrowing is certainly not a bad thing. However, credit facilities have to be used responsibly. If you are already struggling with debt, you have to get rid of it in the fastest and most effective way possible. With clearly set goals, proper planning, motivation and financial discipline, you can get a taste of the true financial freedom.
The main goals which you need to set for yourself are two - clearing all existing debts and remaining free of debt in the future. You need to have a precise plan based on effective strategies for achieving these goals. The major strategies which you have to use include budget creation and management, protection from over-spending, reducing credit and negotiation with your existing creditors.
How to create & manage a budget
You have to have a clear idea of the size of your disposable income during the month. You have to plan precisely what you will spend on and how much you will spend on each item. It is best to prepare a budget with the use of budgeting software tool, which will make things much easier for you and help you to avoid making errors.
If the calculations show that your spending will be higher than your disposable income, you need to remove some expenses from the list. You should start with removing the things which you do not really need. These include entertainment, outings and pampering products which you can go without. You can also move non-urgent expenses to the coming months. If you want to buy a new washing machine, for instance, you can start saving little by little for it from now.
You must prepare a budget for each and every month in advance and stick to it. You can plan for several months ahead as well.
How to spend responsibly
The best strategy is to use cash for making all payments. When you know exactly how much money you have left, you will not be tempted to spend more. It is certainly a good idea to keep the cash for the different types of expenses which you will make in separate envelopes. This will make it easier for you to adhere to your budget. The most important thing is not to transfer money from one envelope to another unless you have extra left.
How to reduce debt
You have to check which credit facilities cause the biggest drains in your wallet. These are typically credit cards and overdraft facilities. The problem with them is that it is very difficult to exercise control over the spending. You have the money available and you need it so you use it. This is an easy path to indebtedness. Besides, credit cards and overdraft facilities usually have some of the highest interest rates.
The most effective way for getting rid of debt on credit cards, overdrafts and short term personal loans is debt consolidation. There are two main options which you can consider. One of them is to use an unsecured loan with interest rate which is lower than the average rate on all existing credit facilities. By opting for a longer term, you can reduce the size of the regular payments significantly. The other main option is to use a secured debt consolidation loan. You can top up your existing home loan or take out a new home equity loan. The secured loan will come with lower interest rate due to the lower risk for the lender. It will have smaller regular payments because of this and because of the longer repayment term.
In order to get and stay out of debt, you should keep one or two credit cards at the most and use them when this is absolutely necessary. You should avoid using overdraft facilities whatsoever.
How to negotiate debt repayment
You should negotiate directly with the lender. You must not wait until your debt is transferred to a collection agency. You can use the professional assistance of a debt counsellor with the negotiations.
Perhaps the best solution which the lender can offer is the repayment of the debt amount in equal instalments over a longer period of time. This is the more effective option compared to postponing the whole payment as you may not be able to safe enough money. If the repayment plan proposed by the lender has regular payments which are too big for you, you can consider a debt consolidation loan with smaller payments. The most important thing is never to use high-interest credit facilities like credit cards for repaying debt.
There is nothing more rewarding than getting rid of debt completely and regaining your financial freedom and independence. In order to enjoy these benefits in the long term, you need to stick to effective budget management and to use credit facilities responsibly. You should definitely adopt a savings plan as well.