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How to manage debt

Published 12 December 2019

If you’re dealing with debt, there are strategies to help you manage it.

Debt is a reality for thousands of Australians, and it comes in many different forms, with the most common forms including home loans, personal loans and credit card debt.

The pros and cons of debt

While debt might sound like a bad thing, it can have a few advantages. In some instances it can let you spread out your expenses while still enjoying your lifestyle and allow you to make purchases, such as a home, that wouldn’t have been otherwise possible. It can also help you to grow your wealth, such as when taking out a loan to finance an investment property or invest in a share portfolio.

But some debts are often called “bad debts”, such as spending above your means, using your credit card or borrowing money to buy too many non-essential items. If your “bad debt” gets out of control it can become difficult to manage and ultimately lead to some pretty serious consequences.

Debt in Australia

Australians have some of the highest personal debt in the world, with mortgages the most common type. Other forms of debt include personal loans and credit-card debt. According to the Australian Bureau of Statistics, nearly one-third of Australian households were considered ‘over-indebted’ in 2015-16, up from one-fifth of households in 2003-04. This means the value of their debts was three or more times their annual disposable income.

Tips for paying off or managing debt

Prioritise your debts

By outlining all of your debts you’ll have a much better idea of your financial situation.

This is where a list can come in handy; it’ll clearly detail each of your debts so you can easily keep track of them. Plus, by putting things on paper rather than trying to manage them in your head, things can seem more straightforward.

List your debts in order of importance, starting with your most expensive or pressing debt. Then move down the list to other items such as your bills, mortgage, car repayments, and insurance. Make sure to include the total amount for each debt, the name of the creditor, and any interest rates attached to the debt.

Create a budget

Setting a budget can help you stay in control of your finances, which may make paying off your debt easier.

The two main components of your budget are your income (including salary, rental income and any other sources) and expenses (such as bills, groceries, gym memberships, school fees and other ongoing costs).

By undertaking a budgeting exercise, you will be able to see if there is any money left over and allocate it to making extra debt repayments so that you reduce your debt more quickly. You might even be able to make a few tweaks here and there – like reducing the amount of online shopping or making coffee at home instead of buying it from a café – to free up some more money that you can put towards your debt.

On the other hand, setting a budget may also reveal that your expenses are higher than your income, which would indicate that you may have been living beyond your means. This might mean that your debt may end up increasing rather than decreasing, and is a sign that you will need to seriously consider which expenses can be reduced to avoid getting into financial difficulty.

Ensure that your budget is realistic. If you try to set aside an amount of money that’s unsustainable it’s unlikely your budget will be successful and last very long.

ANZ has a budget planner that can help you to create a budget in as little as 10 minutes.

Refinance or consolidate your debts

Refinancing or consolidating your debts allows you to roll everything you owe into a single loan. It may involve paying a dedicated refinancing firm to help manage your debts.

The benefits of a refinancing or debt consolidation strategy include:

  • Ease of management – with one regular repayment you may find it easier to track your money. In addition, you’ll only have to deal with one creditor.
  • Budgeting becomes more straightforward - you’ll know how much money to set aside for each repayment.
  • Potential for lower interest rates - depending on your payment plan you may be able to find a loan that offers lower interest rates than those attached to your various debts.
  • Potential for lower repayments - some refinancing firms offer the option of lower repayment amounts (this generally means taking longer to pay off your debt).

When considering a refinancing or consolidating your debt it’s important that you understand the potential drawbacks of this type of debt management strategy, including:

  • Higher debt - you might be able to apply for more credit while paying off your reconsolidated debt, and this may tempt you to spend beyond your means. It’s important to be mindful of your spending while you’re repaying your debt.
  • Higher interest and/or fees - you might end up paying more if the interest rate or fees on the reconsolidated loan are higher than they were on your individual debts.
  • Consolidation of secured and unsecured debts – a consolidated loan may merge your existing unsecured debts (e.g. credit card) with your secured debt (e.g. a home loan). It is important that you are aware of any assets – for instance your home - that have been used to secure your debt as they may be used by a creditor if you are unable to repay your consolidated loan.
  • Turning short-term debt into long-term debt – some refinancing strategies include merging short term debts such as car loans or credit card debt into long-term debt such as home equity loans.

Seek professional help

If managing your debts is becoming difficult you may benefit from professional advice on debt management. A financial planner is a qualified expert who can look at your lifestyle, income and other factors that impact your financial situation and design a tailored strategy to assist you with managing your debts. Benefits of seeing a financial planner include:

  • Streamlining your debt-repayment strategy, making the process simpler and more efficient. And while they can’t teach you how to get out of debt fast, they may be able to make the process more manageable.
  • They can offer objective support throughout the repayment process.
  • They can recommend tools to optimise your situation, and they can update you on rule changes that may affect your finances.
  • Once you’ve paid off your loans, a financial planner can create a plan for managing your finances to minimise the risk of getting into unproductive debt again. Plus, if you’ve set aside any money throughout the debt repayment process, they may be able to help you boost your wealth by redirecting it into investments or other growth strategies.

At ANZ you can apply for financial-hardship assistance, which provides some relief while paying off your debts. For example, you might be able to restructure your loan or reduce your payments to make your debt more manageable.


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