Home #Mamaconfidence Two strategies for reducing your short-term debt
Two strategies for reducing your short-term debt

Two strategies for reducing your short-term debt

Australia’s household debt is one of the highest in the world, with the latest available OECD data (2015) showing the ratio of household debt to income has more than doubled between 1995 and 2015, going from 104% to 212%^. This means that if the average Australian earns $80,000 net per annum, they are spending close to $170,000 every year; compared to twenty years ago when Australians were spending, on average, roughly what they earnt!

While Australia’s total personal debt amount is sitting at around $2 trillion, the average Australian household owes $250,000. This debt can be broken down into a number of different categories including home loans, credit card debt, personal loan debt and more.

Within these categories, some financial experts say there are two types of debt, good debt and bad debt. Sorting debt in this way, credit card and personal loan debt (or short-term debt) fall into the bad sort. It is called bad debt because it diminishes your wealth over time and is, essentially, a waste of money.

If you have short-term debt you are not alone—there are another two million Australians just like you. Thankfully, there are two recommended approaches to getting rid of short-term debt and depending on your personality, one may work better than the other.

What motivates you?

If you are motivated by small, frequent wins, then strategy one, for eliminating short-term debt, is perfect for you. The second strategy is better suited to you if you are more motivated by data and getting the best financial outcome.

Some small steps we can all take.

If your debts are spiraling out of control, begin to resolve your debt by:

  1. Cutting up as many credit cards as possible
  2. Always meeting minimum repayments
  3. Using only ONE credit card for purchases (try to keep it for emergencies only)
  4. Making a list of credit cards you have, how much you owe and the interest rates

If you are motivated by frequent (albeit smaller) wins…

  1. Order your credit card balances from smallest to largest
  2. Pay off the smallest balance first
  3. Celebrate (without using the credit card!)
  4. Move on to the next smallest balance (and so on)

If you are incredibly rational and want the biggest bang for your buck…

  1. Order your credit card balances from highest to lowest interest rate
  2. Pay off the balance attracting the highest interest rate first
  3. Celebrate
  4. Move on to the balance attracting the next highest interest rate

There are also companies like BFF that can help too. Regardless of the option you choose, the important thing is to make a start and to not allow your debt to continue getting out of hand. Your current and future self will thank you for it.

Written by Irit Harris. Irit is the founder of F-Empowered, a platform to empower women to make decisions about how to manage their money.

Aside from being an infinite learner (over ten years in banking, MBA, Diploma of Finance, accreditation to give general advice on banking and insurance products), Irit is a mum to two beautiful kids, wife to the incredibly supportive Josh, and lover of travel, yoga and jogging.

Check out F-Empowered and follow her on Facebook and Instagram.

links^Australians’ household debt nears highest worldwide, www.finder.com.au.

Want to read more? Check out this great article by Moneysmart which provides details on financial counselling and other advisory options

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