Life Coach Steps to cut your debt

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Simple steps to fix your finances

The choices you make and the habits you form in your 20s and early 30s directly effect how much financial freedom you will have in the years that lie ahead. And whilst many can look forward to a prosperous future, for others financial freedom may be a long way off.

Even when things are going well, a recent survey of 12,000 Australians revealed 40 per cent of us ‘stress out’ about money. Indeed, saving for your home loan and keeping up with relentless utility bills, not-to-mention paying off credit card debt, can take its toll, and many Aussies lose sleep over financial stresses – some even experiencing feelings of hopelessness and despair.

But the picture doesn’t have to be this bleak. According to Andrew Livermore, a financial planner from Monash Wealth Partners, there are a few simple steps we can all take to alleviate financial stress and look forward to a richer future. Rather than burying your head in the sand, it pays – quite literally – to confront your money woes head on. Here, Livermore shares his top tips to help you gain control of your finances.

Limit your spending

It’s something of a sad irony that, as our income increases, so too do our spending habits. Suddenly those coveted designer brands are within our grasp, and we fork out accordingly. However, Livermore warns that unless you limit your spending to what is absolutely necessary, your future will be devoid of savings and therefore lacking in financial security.

To help identify where your hard-earned pennies are going, he recommends documenting exactly what you’re spending your money on, and eliminating anything that isn’t necessary until you have the security you need in the form of a healthy savings account.

Create a budget… and stick to it

Budgeting is a simple principle, but one Livermore says many naively overlook. Unless you know how much you’re earning, and how much you’re spending, it’s likely you’ll remain in financial no-man’s land from here to eternity.

If you’ve been put off from budgeting, firstly remember it doesn’t need to be complicated. Simply make a note of what you earn and a note of what you spend. You’ll have fixed outgoings such as your phone bills, rent or mortgage, grocery shopping, etc. and it’s best to allocate some finances to your savings account each month. Whatever’s left is what you have to spend on those ‘nice-to-haves’, like a new pair of shoes or night out on the town.

According to Livermore, however, creating your budget is one thing – sticking to it is quite another. He reminds you that sticking to your budget will bring its own, longer-term, rewards and has a couple of tips to help keep you motivated in the short term:

  • What will you use your financial freedom to achieve? Visualising your goals on a vision board will help keep you determined to achieve them.
  • What budgeting resources do you have to hand? If you have a smart phone, try using an app like Trackmyspend for on-the-go budgeting. No excuses.

Put your credit card away

Although it’s sensible to use your credit card for some purchases – buying online with a credit card, for example, will afford you added security should your details be intercepted – using it for day-to-day purchases not only racks up charges but can also lead to your finances spiralling out of control.

“It sounds enticing to buy now and pay later, but credit will cost you. Fees and interest payments can add up to thousands of dollars,” warns Livermore. Rather, use your debit card – money you’ve already earned and banked – for day-to-day expenditures.

Identify good debt and bad debt

Whilst debt might be causing you anxiety, remember that not all debt is necessarily ‘bad’. According to Livermore, ‘good debt’ includes debt used to purchase investments, such as shares and investment property. The investments generally produce income and/or may also grow in value. Borrowing costs may also be tax deductible. Bad debt, on the other hand, includes debt that carries expenses such as interest payments, and which you can’t get a tax deduction on. Credit card debt, car-loans and home-loans are all examples of bad debt, and your first priority should be paying them off.

Focus on your mortgage

Since you pay our home loan from after-tax dollars, money you put in is effectively giving you a return at the same rate as your home loan interest rate. If you invest elsewhere, your earning will likely be subject to tax. Depending on your personal tax rate, up to almost half of your expected return could therefore go in tax and you might be better off putting that money into your mortgage.

Start a regular savings plan

The earlier you start saving, the longer you’ll have for those savings to grow and accumulate. Start a high interest savings account and put money aside weekly or monthly – just make sure it’s a regular payment. Because superannuation is still seen as the best way to save for your retirement, Livermore suggests contributing your savings towards your super. Retirement may seem a long way off now, but saving for a rainy day never did anyone any harm.

Finally, Livermore has some simple tips to help ward off bad habits and encourage new, healthier ones:

  • Pay yourself first into a separate savings account – leave sufficient funds to cover your day-to-day needs in another account.
  • Pay your credit cards off automatically each month.
  • Commit to two changes you are willing to make in the first month – whether this means buying one coffee a day instead of two or cutting out your weekly manicure.
  • Reduce the number of unnecessary ATM fees you pay by taking out a set amount of cash each week, or by choosing to use your debit card.

What about you? Are you good with your finances or do you tend to bury your head in the sand? What are your best budgeting tips? Tell us using the comments box below.

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