Get Out of Debt, Stay Out of Debt…If You Want to Build a Better Financial Future
Debt is like a weed. The more you ignore it, the more it grows.
Debt can hardly ever be referred to as a positive thing. In fact, the only instance in which debt can really be referred to as a positive thing, is when it aligns itself with investment. This could be something like a mortgage. You pay in monthly instalments to have something that will eventually be yours. Once paid off, who knows, your property may be worth more than what you initially bought it for. Happy days.
So why do people get into debt? Well, aside from the obvious necessity of a mortgage or a student loan there are a million and one reasons. People tend to buy things they don’t need or can’t afford right now, especially when the consequences of extravagant purchases seem a lifetime away. Be it things that they have been emotionally pressured into ‘needing’ or things that help them express a lifestyle to try and keep up with the ‘Jones’s. Debt is pretty easy to get into these days, but you try getting out of it!
The less debt the better
A general rule of paw… sorry thumb… when it comes to debt is to avoid it all costs. Sometimes, when it comes to money and how you manage it, the old ways are the best ways. This includes our perception of debt and what it is. No matter what spin you put on it, a credit card can only ever buy you credit! Credit isn’t the same as buying something outright; it’s essentially a glorified IOU (with some pretty alarming interest rates!). If it isn’t paid back at a designated date, debt can end up landing you in hot water and have serious consequences when trying to obtain credit further down the line.
It’s common knowledge that the millennial generation are in a lot of debt. Although usually, this is off the back of student loans rather than lavish purchases. This, in addition to rising mortgages, lower salaries and an even greater reliance on subscription-based services, millennials are one of the most – if not the most – indebted generations in recent history.
Whilst things like student debt can be unavoidable – especially if you’re looking to further your education – there are ways that you can minimise the effects of debt.
Learning the importance of budgeting
When it comes to paying off your debt, it becomes increasingly important to be more prudent with your money. Prioritising your spending is an effective way of whittling down your debt and saving for things that you want to do. Whilst staying in a few weekends a month may not be as exciting as the alternative, it could actually end up saving you more money than you first anticipated! Who’d have thought that 5 pints and a kebab could prove to be so expensive!
Keeping tabs on your monthly outgoings could prove to be an effective way of saving money. The more money you have in your pocket, the more money you have to pay off your debt. By doing something as simple as keeping tabs on your monthly bank statement, you can effectively reduce the amount of money leaving your account and put it aside for other more important priorities. Culling unnecessary monthly subscriptions (are you even using that gym membership?) could be an effective way of reducing costs and getting your finances in order.
The importance of effective budgeting is moderation. If you prioritise saving over enjoying the things you like, you’re more than likely going to end up miserable (and inevitably fall off the rails at some point!). It’s a case of saving where you can and putting money aside for things you want. Don’t deprive yourself so you’re miserable, get a balance and try and do everything in moderation. If you’re planning to go on a holiday, still go, but put money aside each month rather than leaving it until the last minute. It sounds obvious, but budget sensibly and realistically.
Prioritising your debt
Whilst budgeting is one thing, prioritising the payment of your debt is another. If you have multiple sources of debt it could prove beneficial to focus on paying off the debt with the highest interest rate first. The higher the interest rate, the more potential there is for things to become financially unmanageable over time. Once you have paid off the debt with the highest interest rate (make minimum required payments on the rest) you can then move on to the next highest interest rate and on so on and so forth.
Another way of prioritising your debt is known as “Debt snowballing”. To explain, it’s a process whereby the person with the debt pays the minimum required on their account, with extra money going towards paying off the credit cards with the lowest balances – regardless of the rates. Dave Ramsey of financial peace notes that:
“When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance”.
The psychological benefits of this are that you are gaining momentum gradually over a period of time, and that your debt doesn’t seem as much as an impasse as it did before.
Managing your mortgage
By reducing the term on your mortgage, you can decrease the amount of interest that you pay. However, over the course of paying your mortgage your income is likely to increase.
When it’s time to renew (say after you complete your fixed rate term), look at how much time you can affordably knock off the remaining term of the mortgage.
Also (if you can afford it), consider making over payments if your lender will allow it without incurring any penalties. You could, for example put a percentage of any annual bonus or commission you receive on top of your salary towards the payment.
This method is one that’s becoming increasingly popular with millennials across the UK. Although superficially, the sound of paying off a loan with another loan may sound like tempting fate, if all went to plan, refinancing could potentially prove to be something worth looking into. So, what is refinancing? Refinancing, especially in reference to student loans can be understood as the process of obtaining a new loan with a new interest rate.
You can refinance existing loans by paying off your old loan and getting a new one with different repayment terms and a better interest rate. Great, but what are the key benefits of refinancing? For starters you have the potential to save thousands in interest across the duration of the loan in question. With the extra savings that you make, you could end up having more money to invest with and shave even more money off your existing loan.
So what’s the moral of this story? Well, if you want to invest, it’s best to get debt out of the way – period! Start by getting the debt burden off your back, you’ll feel a lot better about it! There are lots of options open to you and refinancing or snowballing are just a couple. The choice is yours, but please do your research before making any rash decisions. At the end of the day though, it’s best to keep your financial priorities in line and to keep your paws off buying things that you don’t need!