How should I manage my debts?
During your forensic examination of your personal financial situation, take note of any debts that are incurring high interest. The usual suspects include payday loans or credit cards that require minimum payments, where you become locked into repayments but can’t seem to make a dent in what’s owed.
Prioritising paying down these debts is imperative, as it will save you money in the long run as the interest and repayments reduce. Once you’ve got your debts under control, you can start using your money for things that will benefit you, i.e. saving and investing.
Tackling high-interest debts can feel a little like climbing Mount Everest, so equip yourself with a tried-and-true strategy. Here are three of the most effective methods:
Designed to save you the most money in interest over time, the Debt Avalanche method works when you prioritise paying off debts with the highest interest rate first, while making minimum repayments on your other debts.
Like a snowball gaining momentum as it rolls down a hill, the Debt Snowball is based on paying off the smallest balances first while maintaining minimum repayments on the rest of your debts. The quick wins will boost your motivation, and it’s a much less daunting experience.
A less interesting name, sure – but debt consoliation a solid and sensible approach to pulling yourself out of the cycle of endless repayments. This involves rolling multiple high-interest debts into a single loan with a lower interest rate. It makes repayments more simple, and reduces the amount of interest you’ll pay over time.
If you can’t seem to navigate your way out of debt, reach out to a debt relief professional or government service for support. They’ll provide expert advice and a personalised, realistic strategy to help you regain control of your finances.
Pay yourself first
‘Pay yourself first’ is a sound piece of advice from Warren Buffett, CEO of Berkshire Hathaway and one of the richest people in the world.
The way this works is instead of waiting until the end of the month to save what’s left over, you set aside a portion of your pay as soon as it hits your account. It’s a good idea to set up a high interest savings account for these funds, so your savings grow even faster.
Shift your mindset and consider saving each month as a non-negotiable, just like rent or an electricity bill. This is a great way to challenge the notion that you don’t earn enough to save.
Consistently prioritising saving over spending each month is a powerful financial habit that will help you achieve your financial goals faster.
With a little willpower and some forward planning, you can keep your spending on track and live below your means. Continue to stick to your budget, and practice mindful spending. Any time that credit card is burning a hole in your pocket, getting into the habit of asking yourself whether an item is a want or a need is a good way to keep yourself in check.
Just like budgeting, spending less than you earn shouldn’t be taken to the extreme. You’ve worked hard, so you deserve nice things and to treat yourself – just not all the time. In the long run, you’ll reap the rewards of making smart financial decisions, consistent investing and the peace of mind that comes with having your finances under control.
Put your finances on autopilot
The less you have to think about your money, the better. Automating your finances means setting up direct debits and transfers so your bills are paid on time. No avoiding, no forgetting. Your credit score will improve, and the mental load that comes with remembering to make repayments or settle bills, and the manual action of logging in and doing so, is eliminated.
Add contributions to your investment portfolio and retirement account to your list of automated finances. This is another way of paying yourself first, as suggested by the great Mr. Buffett – and supports your long-term financial goals.
By depositing a predetermined amount into these accounts each month, you’ll avoid the trap of trying to time the market. Your wealth will be quietly growing in the background while you focus on the day-to-day.
Prepare for the worst
Building up an emergency fund is one of the best ways to protect yourself against unexpected events (and related expenses) that can crop up at any time. From bones and cars to windows and computers, things break and need to be repaired or replaced immediately.
Having an amount of cash available to deal with these issues instantly keeps you from spending even more by incurring high interest from a payday loan or racking up credit card debt.
It’s also a game-changer when it comes to mental health. When you’ve built up a financial buffer, you’re likely to sleep a whole lot better at night because you know that whatever life throws your way, you’re ready for it.
If you’ve already stashed some cash for those rainy days, consider yourself ahead of the pack. According to 12,400 investors surveyed by Vanguard, emergency savings are the strongest predictor of financial wellbeing.
Financial experts recommend saving between 3 - 6 months’ worth of essential living expenses for an emergency fund. In his book, “Barefoot Investor: The Only Money Guide You’ll Ever Need”, Australia’s Scott Pape, calls this account the ‘fire extinguisher’ – after all, it’s there for when you need to fight financial fires. Pape makes building the emergency fund a little more achievable by setting an initial savings goal of $2,000, and encourages building on the amount once that target has been reached.
He directs his readers to keep the emergency cash in a high-interest savings account that’s completely separate to their other money (and specifies that concert tickets or flights to tropical destinates do not constitute an emergency).
Invest early and consistently
Facts are facts: the earlier you start investing, the more time your money has to grow into a nice plump portfolio. And don’t worry – you don’t have to be a market maven or own a crystal ball to make investing work for you.
Start with small, regular contributions to an index fund and rely on the magic of compound interest. Occasionally lauded as the eighth wonder of the world, compound interest is where your money starts to generate its own money.
The content in this article is provided for educational purposes only. It does not constitute investment advice, financial recommendations, or promotional material.
