Have you entered the new year with existing debt from 2020?

You’re not alone. More than one in three Aussies enter January with Christmas debt from one year to the next¹.

When you combine this with household debt, credit card debt and buy-now-pay-later owings, it’s fair to say many of us will need a helping hand to get on top of our bills.

Household debt has significantly increased with the latest household to net disposable income ratio sitting at 210%² , meaning that on average, people have debt equal to two years’ disposable income. There are also more than 13.7 million credit cards in circulation accounting for a national debt of $21.1 billion³. The buy-now-pay-later (BNPL) industry is also booming. As of June 2019, there were more than 6.1 million accounts, representing 30% of the Aussie adult population and totalling more than $5.6 billion in the 2018-19 financial year⁴.

As we enter the new year, we have outlined three easy steps for you to start the year on the right foot and tackle your debts in 2021.

 

1. Lay it all out on the table

This first step is easy. Grab all your latest bills, statements, invoices, anything you owe. Go do it now, we’ll wait…

Find the most recent copies of your mortgage, rent, electricity, water, gas, phone, internet, car insurance, credit cards, BNPL statements and physically lay it out on the table.

Debt can feel overwhelming. Seeing what you owe and tallying it all up is confronting but it is also a good motivator to get on top of it.

With each debt work out how much you owe and the repayments.

This will prepare you for step 2.

 

2. Identify your smallest debt

So, you’ve laid out your debts and identified the monthly repayments. Next, grab a piece of paper and list the debts from smallest to largest by outstanding debt amount. Number 1 will be the smallest.

Keep this list handy! Store it in the same folder as all your other bills and expenses.

Now, grab your bill with the lowest debt and keep it in a visible place – maybe the fridge, bathroom mirror, anywhere you can see it.

Your focus over the next few months will be to use any savings you have after making your monthly debt repayments, to pay off the smallest debt.

This will involve making additional payments to this debt. Before you know it, your smallest debt will be paid off. You will then put this money into the next smallest debt (that’s number 2 on your list) and so on. Continue this process until all your debts are paid. This is known as the snowball effect.

 

3. Automate your repayments

One of the easiest ways to keep your repayments on track is to set and forget.

All you need to do is set up the repayments for each debt to automatically debit from your account each month. Plus, don’t forget to set a little extra repayment for the smallest debt.

It’s a good idea to set this up soon after you get paid.

 

Why this method works

The method is called the ‘Snowball Effect’. The idea is that the satisfaction you get from paying off the first debt motivates you to pay off the next one. This is because each debt you pay off feels like a big achievement, inspiring you to keep going. It’s also much easier to focus on one thing (debt) at a time, so you’re unlikely to get overwhelmed and give up.

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If you’ve never had a budget, or if you’ve tried and given up on one before, it can be easy to get overwhelmed. Visions of complicated spreadsheets and living on nothing but 2 minute noodles make the idea seem at best, snore-inducing and at worst, overly restrictive. But the truth is it takes very little effort to get a basic system in place. This is great news, as it can mean the difference between major savings and none at all.

If you’re hesitant to set up a budget, or even if you have one now that’s only kind of working for you, here’s a solution that may just work: separating your money into ‘buckets’.

What is a money ‘bucket’?
This concept has been doing the rounds of the personal finance blogs and media for a while now, and it’s a simple one: instead of a complicated line-by-line budget that accounts for every cent, you simply split your income into a separate account – and automate transfers – for each category. That way, you automate your saving and spending so it becomes easy to save: it’s that simple.

Step 1: Track how you’re spending now
For a week, or better yet, a month, track your spending. Many banks in Australia and New Zealand also have this function built in to their online banking, categorising your transactions for you. However you choose to do it, you’ll soon see trends emerging, and you’re ready to move onto the next step.

Step 2: Choose your categories and decide how much goes in each
Once you have all your info, it’s time to come up with a few broad categories that reflect a realistic picture of how you want to spend and save. For example, you could have categories like rent or mortgage and bills, emergency savings, groceries, eating out, fun money, travel savings and debt. Less is definitely more – fewer categories makes for a simple budget that’s easy to stick to, making it easier to save. Once you’ve set your categories, decide what percentage of your income needs to go into each. Assuming you’re not spending more than you’re earning, this needn’t be vastly different from how you’re spending now.

Step 3: Open an account for each category
With a different account for each type of spending and saving, you’ll know exactly how much you have in each. Many financial institutions offer an option for multiple accounts linked together, and you can even give them customised names so you can see, at a glance, how much you have in each one.

Step 4: Set up your automatic transfers
As with many things in life, set and forget is the surest path to success. Make sure you set up direct debits for each of your categories so your money is moving where you need it without you needing to think about it. Many companies will let you split your salary this way, or you could have all your income go into one account to begin with, with regular transfers set up to move money between accounts automatically.

Step 5: Regular check-ins
Whether monthly or quarterly, it’s a good idea to check regularly to make sure each account is where it needs to be. That way, if you find one overflowing while another is almost empty, you’ll know it’s time to tweak your transfers to better match your spending and saving goals.

So what are you waiting for? It’s time to let your savings take care of themselves. see how automating your finances can help you save towards your dreams.

Occasionally life will throw you a curveball that directly or indirectly impacts your finances: you’re made redundant, your furnace dies or you’re expecting a child and you realise you’ll need to upgrade homes in the not-too-distant future.

The last thing you want is to dig yourself into a deeper hole because you weren’t able to manage the financial side of things.

Here are some ways to avoid that, so that you can bounce back sooner rather than later.

1.  Put your spending on lockdown.

The first thing to do is to stop spending more than is necessary. Some of the easiest ways to do that without disrupting your lifestyle too much include:

• Cancelling any unnecessary subscriptions. With so many online providers charging a subscription fee these days, there are bound to be some you can cancel or temporarily shut off. Keep the Netflix subscription if you love movies or the Spotify subscription if you love music, but nix the rest if you can.
• Cutting back on the luxuries. Temporarily swapping a movie night in for a night at the cinema or swapping organic groceries for the non-organic kind can save you some money without disrupting your lifestyle too much.

2.  Review your budget (or create one for the first time).

We’re big proponents of creating a budget so if you haven’t created one yet, now’s the time to get onto it.

Even if you already have a budget in place, now’s a good time to revisit it.

If there’s anything this situation can teach you, it’s that your financial situation doesn’t stay the same forever. Pull your budget back out for a re-review and see if there is anywhere else you can cut back.

3.  Check your financial institutions’ financial hardships policies.

If you’re having a hard time making ends meet even after tightening your belt, you may want to reach out to your bank, lenders, utility companies and anyone else you owe money to.

They’ll often have financial hardship policies that will temporarily halt your payments or reduce them, so that you can continue to meet your obligations and avoid late fees and defaults. After all, the last thing you want to do is make a difficult situation worse by going even deeper into unnecessary debt.

4.  Cash out your rewards points.

If you have any rewards programs like frequent flyer points or credit card rewards , you may have the option to convert your points to cash or use them like cash toward your next credit card payment.

Using points for cash usually doesn’t go as far as using them toward merchandise or flights, but it may be worth it if you need to “buy” yourself another month or two.

5.  Make minimum payments where it makes sense.

When life throws you a financial curveball, it often makes sense to hang onto as much cash as possible so that you can pay any additional unexpected bills that crop up. For example, if your best friend (aka, your dog) has emergency surgery, you’ll probably want some cash handy for any unexpected prescriptions during the recovery phase.

That means it might make sense to reduce loan payments to the minimum due so that you don’t find yourself back to square one when yet another bill comes knocking.

6. Get help.

If you find that your financial situation is more than you can handle alone, there are organisations that can help, like National Debt Helpline or various state-based debt advice services. You can find a comprehensive list of these services here.

Stay strong

We all experience situations that test our finances at one time or another – often multiple times throughout our lives. The key is to take strong action to keep the financial hit from spiraling out of control.

And if you do find that such situations test your mettle a little too much, it’s never too late to start thinking about a curveball account (perhaps better known as an emergency fund). This is a savings account specifically set up to help you through times like this.

That way next time, it’ll be just that little bit easier.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

If you’ve thought long and hard about your need to get a credit card, and have narrowed down your options after an exhaustive comparison of rates, fees and perks, then the next step in the process of getting a credit card is to actually apply for one.

Nowadays, most card providers let you do all this online, but applying for a credit card isn’t as easy as ticking a box. It can be a bit of a process, involving photo IDs, payslips, declaring your assets and so on.

Credit card companies have to take care when assessing your credit card application, as they need to make sure they’re giving the right card to the right person. So you can expect to have to do the following things when applying for a credit card.

You need to meet the eligibility requirements

As a general rule, successful credit card applicants need to be at least 18 years old and be either a citizen or a permanent resident of Australia, although there are a (limited) number of institutions that offer credit cards to temporary residents.

Credit Card issuers also have obligations that mean they need to lend responsibly So you will need to prove your capacity to handle the credit card based on owing the maximum limited, also show evidence of your income. It is likely that the credit card issuer will also undertake a credit check credit score requirements.

Depending on the card and the provider, you might need to be earning over a certain threshold per year and have a credit score above a certain number. People who have a lower income and/or have a poor credit score may struggle to be approved for some credit cards, particularly high-end rewards and premium credit cards, but it depends on who the card belongs to.  

You need to provide personal details

At this point it’s time to open up and share some personal information. No, you don’t need to tell them your deepest fears or hopes and dreams, just some basic details about yourself, mainly:

• Your full name and date of birth
• Your residential address, and any previous residential addresses (as well as how long you’ve lived there)
• Contact details
• The number of dependents you have
• Your employment information and your occupation (are you self-employed? retired?)
• Your income

They will normally ask you to provide ID, so make sure you’ve got a photo of your driver’s license/passport or a copy of your birth certificate or Medicare card on standby.

You need to show proof of income

Often just stating your income isn’t enough. Credit card application forms will likely ask for proof of income, which is usually the following:

• Full-time or part time employees need some of their most recent payslips (often two), or bank statements showing your most recent salary deposits
• New employees can show newly signed employment contracts
• Self-employed people must show their most recent tax returns
• Pensioners must show a statement from Centrelink confirming their entitlements, or their most recent bank statements showing government income credits
• Retirees must show their most recent bank statements or annual investment statements
• Those with other income types need to show things like signed tenant leases, bank statements of rental credits, deposit certificates, personal tax returns etc.

When applying online, they usually give you the chance to drop an attachment in, and even authorise your bank statements so that there is no paper involved.

You need to enter your financial information

Credit card providers need to consider your whole financial situation, not just your income. After all, someone with a high income can still lose money each week if they spend too much money at the pokies or have massive debts.  It’s all about do you have enough income that is available to handle the debt.

So don’t be surprised when you’re asked for a detailed list of your financial assets (savings, shares, valuable items you own) and liabilities (car loans, mortgages, other credit cards etc.). You may also have to give them an estimated monthly expense list, including major payments like rent, groceries, mortgage repayments, transport costs and so on.

Take some time to sit down and go through your bank statements to get all of this information together – this will make everything much easier.

It’s also a good idea to get your saving under control before you apply.  Doing this will increase the chances of being approved.

What not to do when applying for a credit card

One of the worst things you can do is lie, or just be inaccurate, on your credit card application. Failing to tell the bank about a large outstanding loan or a huge debt from other credit cards could lead to your application being rejected. Worse, if you’re somehow approved, and the bank finds out you lied later on, you could get done for credit fraud.

If you get rejected once, don’t go around applying for dozens of other credit cards immediately after. Each application goes on your credit score, and too many applications in a short space of time leaves will lower your overall credit score. And the lower the score, the harder you’ll find it to get approved.

But above all, don’t apply for a credit card that’s above your means. Look for one with a suitable credit limit, interest rate and fee structure – you don’t want to rack up credit card debt too easily.

It can be all to easy to chuck anything money or finance related in the too-hard basket. But the truth is, spending a few minutes sorting out just one aspect of your finances can make a big difference.

If you’ve got 10 minutes to spare, complete one of these money saving tips and you could see instant financial results.

Empty your spare change into a jar
Then pop on the lid. Now every time you’ve got a few bits of shrapnel, chuck ‘em in. This is now your bonus money. Whenever the jar is full, you can either deposit it at the bank or use it to treat yourself.

Set up a high interest savings account
It’s probably been on your to-do list for a while, so pop open your laptop and set this up now. It doesn’t take long and there are heaps of added benefits – for example, some accounts have free overseas transactions (as long as you make regular monthly payments).

Make a grocery list
Check your cupboards and your fridge and then go through the week in your mind day by day to figure out what you need in your next shop. Obviously, this one only works if you shop to the list. Plus, if you only hit the supermarket once a week, you’ll make bonus savings.

Switch energy or insurance providers
New customers almost always get the best deal, so why not be one? Call up a rival electricity, gas or insurance provider, get a quote, and switch to them. Chances are, you’ll pay a lot less.

Set up your bills to come out automatically, or pay them early
Most energy providers give discounts for customers who pay early, or even just on time. You can take advantage of this by either setting up direct debits to come out early, or paying on time each month.

Pack your lunch for tomorrow
Whether you’re heading to work or just out for the day, a container of leftovers or a simple sandwich can save you up to $20 if you find yourself getting hangry when you’re away from home. Ditto for a byo water bottle and/or morning coffee-filled keep cup.

Sign up for a Spend tracker to track your spend
Most of the time, we engage in ‘mental accounting’ – we think we have a pretty good idea of where our money goes, but actually, the picture we have in our minds usually doesn’t match up with reality.

Sign up for a money-tracking app and you’ll know where you can easily make a few cuts.