Introduction:
There may be times when you add up all your debts or look at your credit card statement and have a bit of a panic. To help you manage your debt position, here are ten quick and easy tips.
1. Consolidate Your Debts:
Pool all your debts into one. This can reduce your overall interest cost, especially if you combine high-interest credit cards into a line of credit facility. However, if the line of credit is attached to your mortgage, you might be eating into the equity on your home, which may not always be wise.
2. Use a Consolidated Cash Account:
Set up your income sources, including your salary, interest, dividends from investments, and rental income, to be paid into one consolidated cash account such as a cash management trust (CMT) or high-interest cash account. Organise for all loan repayments to be deducted from this account automatically, taking the worry out of paying on time.
3. Draw Up a Budget:
Knowing what you spend, what you earn, and the difference between the two is crucial. Detail essential and non-essential expenditures. If you fall short of meeting bills and debt repayments, you’ll know where to cut back. The reduction may only need to be temporary until your debts are under control.
4. Use Taxation Benefits:
While tax alone shouldn’t drive investment decisions, lower tax can help boost your effective returns. Consider how you can maximize the tax effectiveness of your investment decisions. For instance, the 50% reduction in taxable profit if you sell an investment held for at least 12 months can increase returns, aiding in debt repayment.
5. Be Smart with Lump Sums:
When receiving a lump-sum payment like a tax return, inheritance, or windfall gain, resist the urge to splurge. Use the money to reduce your debt to more manageable levels for long-term satisfaction.
6. Get Smart with Credit:
A credit card with an interest-free period and a drawdown facility on your mortgage can be advantageous if used wisely. Pay your salary into your mortgage and use your credit card for all expenses, then draw down from your line of credit each month to pay the credit card bill just before the interest-free period ends. Ensure you don’t spend more than your mortgage input to avoid financial setbacks.
7. Be Wary of “Interest-Free” Offers:
These offers can be traps as the interest rate on outstanding balances at the end of the interest-free period is typically high. Penalties may also apply for late payments. Ensure you have adequate cash flow to repay the loan before the interest-free period ends.
8. Be Cautious with Short-Term Lending Facilities:
Payday lenders and money exchange services can be very costly. These should only be used as a last resort due to their high-cost loans.
9. Keep an Emergency Fund:
Maintain a small cash reserve for unforeseen circumstances. This will protect you from having to resort to costly, short-term lending arrangements.
10. Automate Your Debt Payments:
Talk to your employer about having your salary paid into multiple accounts, including debt accounts, for better income flow management. Alternatively, set up automatic deductions from a nominated account to pay outstanding debts. Ensure the account has enough funds to avoid dishonour fees from the bank.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
