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Many Australian’s don’t have a plan despite Australian households being the fifth most indebted in the world, according to data from the OECD. A typical family with disposable income of $100,000 has an average liability of approximately $210,000. And with rising interest rates and rampant inflation, the cost of living will only continue to escalate.
Home loans, credit cards, car loans and personal loans all contribute to financial pressure. One and a half million Australian households are currently under mortgage stress, so if you feel overwhelmed by debt, then rest assured you’re not alone. But with dedication and a smart strategy, you can quickly get your cash flow back.
1. Know where you stand
When it comes to reducing liability, a plan is critical. But before creating a workable liability reduction strategy, you need to clearly understand your financial situation. That’s not always easy when you’re struggling just to get through the week. The first step is to figure out exactly what you owe. List your debts and monthly repayments, then calculate the total.
2. Create a budget
Determine your monthly income, including salary, benefits, and investment earnings. Then list your essential living expenses for things like accommodation, food, electricity, gas, internet, phone, and transport. Identify non-essential expenses that you can eliminate or reduce, and then compare money in versus money out to calculate exactly how much liability you can afford to pay off each month in your plan. To make this process easier free budgeting tools are easily accessible via the Government’s “Moneysmart” website.
3. Prioritise your debts
Figure out which debts are critical and pay them first. This might include mortgage repayments, council rates, taxes, and utility bills. If you genuinely can’t afford to pay any of these, then you may be able to request financial hardship assistance from the service provider. Lower priority liabilities might include personal loans and credit cards. But due to the high interest rates for credit card debt, you should pay off your card in full each month if possible.
4. Avoid bad debt
Once you begin paying off your loans, it’s essential to stick to your plan and avoid the temptation to take on more debt, particularly bad debt. Staying disciplined in your financial journey means understanding the difference between good debt and bad debt and ensuring your plan focuses on building wealth and securing your future.
Good debt is money owed for assets or investments that can increase your net worth or generate income, such as home loans, education loans, or even a car loan, provided the vehicle is essential for your job. These types of liability contribute to long-term financial growth. On the other hand, bad debt refers to money borrowed for consumer products or experiences that don’t add value to your financial situation, like holidays, luxury items, or entertainment.
By adhering to your plan and prioritizing good debt over bad debt, you can stay on track to achieve financial stability and avoid unnecessary setbacks.
5. Build a safety net
Once you’ve gained control over your liability obligations, it’s time to focus on building a financial safety net. An emergency savings fund is crucial to protect you from unexpected expenses like medical bills, car repairs, or sudden income loss. This fund provides peace of mind and ensures you don’t have to rely on credit or loans during tough times.
If you’re a homeowner, a strategic way to build your safety net is by requesting a redraw facility on your home loan. This feature allows you to make additional repayments toward the loan principal, which helps reduce your overall interest costs over time. The added benefit of a redraw facility is flexibility—you can withdraw from this buffer when unforeseen expenses arise, ensuring you have access to funds without derailing your financial progress.
6. Seek help for your plan if you need it
Don’t be afraid to ask for help. If you’re feeling overwhelmed by your situation, or if you need to get your plan back on track, then you can always seek advice from a financial counsellor or professional financial planner.
