If I can’t see it, it can’t see me

previewYour debt can see you just fine.

Whether it’s student loans, a mortgage, overdue credit card bills or tax debt, you CANNOT HIDE.

I get so worried when I hear of people just shutting down and ignoring their money problems. Often, debt can be paid off faster than people think. But there’s a bit of pain involved. So it’s easier to just hide and pretend it’s not there. I think sometimes people find themselves at a certain stage in their life and think “I’m x years old. I shouldn’t be in debt”. And then they act like they aren’t. The truth is that debt isn’t just for uni students and young adults. Loads of people are in debt.

The Australian Bureau of Statistics has some pretty alarming and depressing stats about debt levels in Australia. According to the ABS, in 2015-16, almost 3/4 of households had some kind of debt – the average debt being a huge $168,600. The most common debt was thanks to credit cards, then home loans, then uni loans. Interestingly, during this period, the highest income earners had the highest amount of debt. Lifestyle inflation is a killer.

So, maybe you have a debt of a few thousand dollars, or perhaps it’s well over the average. Regardless of the amount, if you pretend it isn’t there, or that making the minimum payments is a great way of dealing with it, you’re not going to have a great financial future. There’s a big difference between being scared but taking small, uncertain steps towards resolving a problem, and just totally ignoring a financial sinkhole.

The first step is to burst all your bubbles. You aren’t going to win the lotto. You aren’t going to magically get a huge inheritance that will fix your problems. Nobody is going to gift you a chunk of cash. You might get a promotion or better paying job, but it’s unlikely to help if you haven’t got your shit together in the first place.

The second step is to gather up all your information. Write out everything you owe – including loans from family and friends. Write down who you owe, what the money was used for, when you took the loan, how much interest you pay and when you need to pay it all back by.

It might look smaller than you think. Or it might look horrifying. Don’t panic. You can dig yourself out. Debt repayment deserves it’s own post – there are some great schools of thought that warrant some discussion.

The point of writing all your debt down is to get all the information in front of you so you can start making decisions. Hiding from the debt doesn’t work. Borrowing from loved ones to cover the gaps doesn’t work. Constantly living from payday to payday doesn’t work. What will work is taking a good look at everything and making some firm decisions.

It might not even be debt you’re hiding from. It might be the sheer impossibility of buying property, or the difficulties of working out if you can afford to start a family. It might be the dream of travel or changing careers. Write down the numbers. Income and expenses. Be brutally honest with yourself.

The third step is to choose a strategy to pay it off. I’m a big believer in killing off your debt before you do anything else. Even if the debt has a low interest rate, or it’s a loan from the bank of mum and dad. There’s a mental weight that comes along with owing money, and I firmly believe that unless you are completely on top of things in your world, you’re better off having a clean financial slate. The strategy I love most is the debt snowball. The idea is that you pay the minimum amount on all of your debts, and any leftover money that you have goes towards paying off the smallest debt you have. Once that smaller debt is paid off, you put the money that was going toward it, into paying off the next smallest debt. This way you get wins as you go. Paying off debt can feel very liberating. The debt snowball method has one major flaw. You need to take your interest rates into account. If you have a $5000 debt that has a 25% interest rate (wtf are you doing, that’s a ridiculous number), compared to a $3000 debt with a 5% interest rate, then you should be selling all your excess stuff, getting a second job and smashing that $5000 debt as fast as humanly possible. A different approach, known as the debt avalanche method, caters to this, as it has you organising your debt according to interest rates. You pay off the debt with the highest interest rate first. Both methods have merit, but I believe that the debt snowball, combined with a tiny splash of common sense, is much better as it gives you easier wins along the way.

Of course, if you only have one or two large debts, these methods aren’t very helpful. Let’s say you have a HELP (HECS) debt, and a mortgage. In this situation, it’s time to make sure you understand the terms of your mortgage, and do some calculations to see how fast you could pay your debt off if you cut down on your spending. Every single pay-rise you get should be immediately pumped into paying down your debt. Every tax return, and every end of year bonus.

I think that for most people, it’s not that it’s too difficult, or that they can’t do it. It’s more that getting finances on track can be a slippery thing. We intend to take steps to resolve issues, but we procrastinate and put it off. Currently, I’m trying to persuade my partner to help me do our taxes. When I mention it, one of us inevitably suggests a vague time in the future. When that time comes around, the laundry needs doing, the floor needs mopping and we suddenly find ourselves inspired to tackle a million small projects. It would take us an hour, but for some reason that hour is grown into an unbearable monster that we don’t want to think about.

But, if we sat down now, and just churned it out, the monster would be gone. If you have out of control debt, you could sit down right now, write it out and get on a better path. Think of how amazing it would be to not have debt, or to be able to finally fulfill a long standing dream. It can quite literally start with just a paper and a pen. Of course, that’s after you do the laundry.

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