3 ways to eliminate the endless debt cycle

Article originated from sorted.org.nz

When was the last time you were debt free? 5 years ago? 15 years ago? Not since your 20s? While you may be managing to repay your debt without having it spiral out of control, wouldn’t you rather be one of the 1 in 4 New Zealanders who is completely debt free?

Here are 3 actionable ways to help break you out of the debt cycle for good.

1. Track your incoming and outgoing money

You know how much money you will be receiving in a week, or can estimate it. You are also able to figure out how much you spend on housing, bills, petrol, public transport, and grocery shopping in a week. We can estimate how much we spend on car servicing, rates, haircuts, birthday presents, holidays, etc. on a monthly or yearly basis and divide that up to a weekly rate. This is the basis of a weekly budget.

If you do this task and find your outgoings are more than your incomings, then one of these areas needs to decrease. If you find yourself with more incomings, but still debt building, then it’s due to hidden incidentals, like meals out, playing lotto, clothes purchases, etc. Log every purchase you make in a week – and do it for at least a month – to see where your money is going.

Budgeting apps, such as Sorted’s calculators, can be a really easy way to do this.

2. Stop just making minimum repayments

Minimum repayments are how the majority of money lenders make their money. While minimum repayments are a good way to “keep our head afloat”, it means that you end up paying a huge amount more in the long run. For instance, if your credit card interest rate is 18%, you have $5000 owing, and your minimum repayment amount each month is 2% ($102 in the first month) of what’s owed, you would pay a staggering $17,181 over 33 years! By increasing your repayments to $250 every month you’d pay just $5883 over 2 years.

Try out Sorted’s mortgage calculator to see how much you could save on your loans.

3. Make debt elimination a priority

We can all reduce debt, if we make the sacrifices necessary to do so. For most, we accept debt as a natural part of our lives, which doesn’t require much thought, other than the necessary repayments. However, this lack of thought is costing us, with the average level of household debt now sitting at around 170% of our disposable yearly income.

Because we are stuck in debt, we see it as something that we have to put up with. However, the faster that we pay off debt, the less we have to spend, and the less likely we are to see our debt levels rise.

To make debt elimination a priority we need to practice thoughtfulness. Think before purchasing that new winter coat – do you really need it? Perhaps you could try an op shop? Choose a $5 bottle of wine for dinner instead of a $15 bottle of wine. Cook with cheaper ingredients and less meat. With money left over at the end of each week, put it straight into your loans – there’s no reason to wait until the end of the month for repayments.