How to decrease your debt

When we look back over time, it’s easy to see where we stepped into debt, compounded more debt, then didn’t manage money well so the debt kept growing. This might have been a big-ticket purchase like a holiday or new car, changes to your family or a period of lower income.

What’s also easy is to feel overwhelmed by financial burdens. What many people in this situation don’t realise is that by ignoring the problem and not taking action, you can find yourself in a debt spiral that is tricky to recover from.

Don’t panic. Out-of-control debt is uncomfortable, but advice and some changes to the way your finances are structured is a big part of a financial recovery plan. A qualified financial planner can help to set you on your way to more effective money management.

Do the sums and work out where your money goes. What do you spend the most money on? Think about ways to cut down how much you spend. This might be cancelling subscriptions you don’t use, trimming non-essentials out of your grocery bill, taking public transport to work instead of driving, spending less on entertainment and generally cutting out luxury items. Work out a budget for each pay period and stick to it religiously.

Work out which are your non-negotiable expenses, such as your mortgage repayment, and take care of these first. It’s all about prioritisation. This financial recovery plan is about lowering your debt load and protecting your credit history, so make sure you don’t lose sight of the big picture. Check your home loan interest rate; if it’s not a good deal, talk to your lender to negotiate a lower interest rate.

Next, determine which is your most expensive debt. This will be whatever has the highest interest rate rather than what is the biggest debt. Chances are it will be a store card or credit card. Making the minimum payment on a credit card does nothing to reduce the debt, it just pays some of the interest so the debt will keep growing unless you are able to pay it down. Take the money you are saving from your budget-trimming exercise and pay it off the credit card until the debt is gone.

Once the card is paid off, add the monthly minimum repayment to the extra sum you committed to paying it down and start the process on your next most expensive debt. Add these two amounts to the minimum payment on that debt, and you’re off. Some people call this the Snowball Method of decreasing debt.

If this doesn’t sound like something you could commit to, there are other steps you can take to manage your money better and take control of debt, such as refinancing to consolidate your debts into a lower interest rate loan. Talk to a financial planner to work out which will be the best path to financial recovery so you can decrease your debt, increase your savings and grow wealth.