- Household debt is growing every year
- The difference between “good” debt & “bad” debt
- 9 proven ideas to pay off your debt faster (whether that's “good” debt or “bad”)
A fact-finding mission
- Australian household debt has steadily risen over the past three decades
- The ratio of household debt to income has more than doubled between 1995 and 2015, going from 104% to 212%
- This means if the average Australian earns $80,000 net, they are spending $169,600 per year.
- Australia is now reported to have some of the highest personal debt levels in the world.
- The average Australian household in 2015 owed $250,000, made up of:
- Mortgages 56.3%
- Investment debt, e.g. rental properties or shares 36.5%.
- Personal loans 3.1%
- Student debt 2.1%
- Credit cards 1.9%.
The difference between “good” and “bad” debt
Not all debt is the same. There’s debt that builds your wealth, allowing you to buy shares or property. This is “good” debt.
Then there’s “bad” debt. This is when we use debt to buy things that aren’t going to make us money: cars, holidays, clothes, etc. This debt usually comes at a high cost (think 14% APR on credit cards)
If you look at Australian debt figures, most of our debt is in the form of “good” debt: 56.3% on home loans and 36.5% on investments. So, a total of 92.8% of our personal household debt is spent on potential wealth-creation.
The other 8.2% is “bad debt”, which if the average total debt is $250,000, means that $20,500 is “bad” debt: credit cards, personal loans and student debt.
And, by the way, whatever Western country you’re from, the figures are likely to be similar to these, so don’t get smug thinking that Australians are worse at handling debt than you are. The US has a much higher percentage of credit card/loan debt – 26.3%, and total debt at around 120% of income. The UK's household debt stands at 150% of income and Canada’s is even higher.
The fact is, no debt is “good” if you’re struggling to pay it.
The easy thing to do is to stick your head in the sand and try to ignore it in the hope that it will go away because it’s just too hard to face.
But sometimes, disaster strikes and we’re forced to confront our circumstances head-on. A series of unfortunate events — a sudden job loss, an unexpected (and expensive) home repair, or a serious illness — can knock our finances so off track and we can barely keep up with our monthly payments.
It’s in these moments of disaster when we finally realize how precarious our financial situation is.
Other times, we just become sick of living paycheque to paycheque and decide we don’t want to do this anymore.
For many people, becoming debt-free the hard way is the best and only way to take control of their lives and their futures.
How to Get Out of Debt Faster
Unfortunately, the space between realizing your debt is out of control and actually getting out of debt can take months or even years. The trick is to make the process as easy for yourself as you possibly can.
Remember, we can only tolerate feeling deprived for so long before we rebel and do something to make ourselves feel good.
The secret to taking control of our finances, getting rid of debt and creating a solid financial foundation for ourselves is to make sure that we don’t feel deprived. Whatever plan we create must include things that make us feel good and don’t leave us feeling deprived.
Fortunately, some strategies exist that can make paying off debt a much faster and much less painful process — and a whole lot less painful.
If you’re ready to get out of debt, try these proven methods:
1. Make more than the minimum payment.
If you have a credit card balance of $15,000, pay a typical 15% APR, and make the minimum monthly payment of $300, guess how long it's going to take to pay it off. Bet you can't.
6 years and 7 months.
And you'll pay $11,000 in interest.
Bear in mind, you'll only pay it off in 6 years and 7 months if you don’t add to the balance in the meantime. That's a challenge on its own.
Whatever kind of debt you have, the best way to pay them down sooner is to pay more than the minimum monthly payment.
And to not use them again, of course.
NB Some loans charge early payment penalties. Just check that yours isn’t one of them. But do the calculations anyway: it may be cheaper to pay it off early than to pay the interest.
2. Use the debt snowball method.
This is how it works.
- Make a list of all your debts from smallest to largest.
- Pay the minimum amount against all of them except the smallest. You pay as much as you can against that one.
- Once the smallest balance is paid off, start putting the money you would have paid against that toward the next smallest debt until you pay that one off.
- Repeat until all debts are paid off.
You can use this same technique but by listing out your loans in highest to lowest interest rate order and pay off the ones with the highest interest rate first.
Over time, your smaller or more expensive balances will disappear one by one, freeing up more money to put towards your larger debts and loans.
This “snowball effect” allows you to pay down smaller or more expensive balances first — giving you a few “wins” for the psychological effect — while letting you save the largest loans for last.
Ultimately, the goal is snowballing all of your extra money toward your debts until they’re all paid off… and you’re finally debt-free.
3. Make some extra money.
Sorting out your debts with the debt snowball method will speed up the process, but if you want to make a much bigger difference, you need to bring in some extra money.
Relying on one income is dangerous and leaves you open to failure until you’ve got your finances all sorted (read this article). In the meantime, set up a second income from somewhere.
You could do odd jobs or weekend things such as mowing gardens or cleaning houses, or you can set up an online business, maybe a blog (learn about setting up your own money making blog here) or learn how to become a Virtual Assistant.
Sites like TaskRabbit.com and Upwork.com allow nearly anyone to find some way of earning extra money on the side.
Note: any extra money you earn needs to go towards your debts. It’s not there for you to go out and spend. Sorry to be so blunt, but I wanted to just put that out there because I know that when I got some extra money in, the first thing I’d do would be to go out for a nice dinner or buy myself that pair of jeans I’d been eyeing up (or maybe a bridle for the horse or definitely something for one of the kids).
The extra money is to pay off your debts.
4. Do a backwards budget (and stick to it).
If you’re going to really get on top of your financial situation, you need to know exactly where your money is going 100% of the time.no excuses.
You need to know how much you’re spending on what.
I personally don’t like traditional budgets. For me, they set me up for failure because I can’t stick to them for long and I wind up feeling useless and giving up on the whole thing.
A backwards budget allows you to pay yourself first, i.e. pay down your debts and pay up your savings before anything else goes out.
Like I said earlier, always allow some room for those little extras that mean that you can treat yourself for doing a good job and working towards getting yourself out of debt.
5. Sell everything you don’t need.
If you’re looking for a way to drum up some cash quickly, take stock of your belongings. Most of us have stuff lying around that we rarely use and could easily live without.
The psychological impact of having a good clearout is huge. It lifts our spirits and leaves us feeling much clearer and freer.
So why not sell your extra stuff and use the funds to pay down your debts? It’s a double whammy in the feel good stakes!
You could sell stuff on Gumtree or Facebook Market, have a garage sale or go to a Car Boot Sale. All else failing, maybe call a second hand furniture place to see if they’re willing to buy it or call a charity and donate it to a good cause.
6. Negotiate your bills
Just recently, I got in touch with a broker about our health insurance. We’d been with the same insurer for about 20 years or so and they’d been great, but the monthly costs kept going up and going up and I seemed to be getting less and less in return.
I’ve now got a higher coverage of extras that I use and it’s costing me $90 a month less.
We did the same thing with our life insurance and saved $400 a month.
Then we did the same with our mortgage and saved over $800 a month.
The broker told me that the rule of thumb is to change companies every two years. All companies, whether that’s banks, insurance companies, utilities suppliers, whatever, offer great discounts to new customers but don’t offer the same deals to their existing customers. So, change.
Or phone up your provider and insist that they offer you the same rate they’re offering new customers or you’ll take your business elsewhere.
It’s your money, take care of it.
If you’re not the negotiating type and you're in the US, you just got lucky because you have a service called TrueBill (there are others but Truebill was the first). The Truebill app will review your purchase history to find forgotten subscriptions and other repeating fees you might want to cut from your budget, and it can even negotiate some bills down for you.
Unfortunately, there's no similar service that I can find in Australia, so my fellow Aussies, Kiwis & Poms… you'll have to get on the phone.
7. Transfer your credit card balance
In the unlikely event that your credit card company won’t budge on interest rates, then consider a balance transfer.
Credit card companies are always offering 0% interest on balance transfers, usually for 15 months or so. Just be aware that there may be a fee of up to 3% for transferring your balance. There might not be, just check and shop around if necessary.
If you’re planning on paying your card off, this may be ideal as it may reduce the interest that you need to pay to zero. Whatever you're paying off is purely the money that you borrowed.
8. Use any unexpected extra money to pay off debt
Most people come across some type of unexpected income throughout the year. It might be a pay rise, an inheritance, a bonus at work or a nice tax refund.Whatever type of unexpected money it is, spend a little on celebrating if you want to, but put almost all of it towards helping you become debt-free.
9. Change your habits: avoid temptation
We’re all tempted by something. It might be catching up with friends at the local shopping centre for a coffee (me), browsing the internet and “just checking” what’s new in our favourite online store (my daughter), or driving past our favourite restaurant and wishing we could pop inside for a meal (John). If you have a credit card in your wallet, the temptation may prove too big.
Whatever your biggest temptation, it’s best to avoid it altogether when you’re paying down debt. When you’re constantly tempted to spend, it can be difficult to avoid new debts, let alone pay off old ones.
So, avoid temptation wherever you can. Change your habits. Go a different way home. Go somewhere other than the shopping centre to meet your friends for a coffee. Do something other than browsing the online stores. Put the credit cards away somewhere safe, don't keep them in your wallet.
Change your habits so that temptation isn’t put your way.
The Bottom Line
No matter what type of debt you’re in — whether it’s credit card debt, student loan debt, car loans, or something else — it’s important to know there is a way out. It may not happen overnight, but a debt-free future will be yours if you create a plan and stick with it long enough.
No matter what that plan is, these strategies can help you get out of debt faster.
And the faster you become debt-free, the quicker you can start living the life you truly want.
What are some strategies you have used to pay down debt quickly? Have you ever tried anything on this list?