If Your Debt Is More Than Your Disposable Income…Then Take Action Now Before It’s Too Late!
Did you know?
The average Australian household has a debt of approximately 150% of their annual disposable income.
Australian household debt increased almost six-fold between 1990 and 2008, but more surprisingly our household debt grew twice as fast as the total value of our assets in the same period.
That’s just the wrong way around!
• Is your debt growing faster than your assets?
• Are you concerned about your debt situation?
• Are you struggling to make your repayments each month?
• Does it always seem like your bills amount to more than your wages?
If you answered yes to one or more of these questions, then perhaps it’s time to look at a solution for your debt condition, NOW, before it’s too late.
What is the solution?
We all know that good budgeting and discretionary spending discipline is the real answer, but sometimes it doesn’t matter how well you budget there’s just not enough money to make ends meet. In this instance, debt consolidation may be the option for you.
Why do we have this debt problem?
Some people fail to recognise that when they use credit to purchase items for consumption or use today, they are spending their future pay cheques before they have even received them.
Banks offer credit cards, with pre-approved limits, without checking credit histories or capacity to repay.
This gives us an abundance of credit at our finger tips with little or no responsibility.
As a result of having this abundance of credit, as an instant gratification society, some are then tempted to use it without considering the future consequences.
This differs significantly to the past where we saved or used the lay- by method for the items we wanted. Little wonder we find so many people today experiencing considerable financial trouble.
What are the first signs of trouble?
• You recognise it is unlikely you are going to be able to repay your existing debt with your foreseeable future income.
• You now have multiple credit cards.
• You are no longer paying the balance of your debt each month – you just pay the minimum amount.
• You arranged for more credit cards (or a personal loan) to help pay off the other cards.
• You added a store card(s) because there was no room left on the credit cards.
Then eventually your repayments start to quickly approach or exceed your income.
What needs to be done?
Well I could advise that you need to budget. But the reality is, most of us won’t. Or they will start a budget, it will last a month or two, and then give up because the debt is not being paid down quickly enough.
For some it’s too late for budgeting because the debt level is already greater than the income and there is nothing that can be done.
A solution (and this is NOT for everyone) may be debt consolidation.
What is debt consolidation?
This is when you take multiple debts (where the majority of the debt has a much higher interest rate) and consolidate the debt into one loan with a lower average interest rate.
Generally most people opt for refinancing against their home (using existing equity) as it has the lowest interest rate.
For example your home loan rate may be 5.3% as opposed to a personal loan that might be 9.9% or higher (definitely lower than most credit cards at around 20%).
Consolidating all debt into your current home loan at 5.3% saves significant interest and gives you the opportunity to gain control of your financial situation by reducing your monthly repayment and freeing up cashflow to start repaying the debt.
Sometimes when you refinance it gives you a false sense of financial security with the additional cashflow available to spend each month. Don’t be fooled or you will return to the same position, but perhaps next time with no equity in your home to bail you out.
Remember, debt consolidation is not a ‘cure all’. To ensure you do not repeat your previous mistakes you MUST:
1. Not spend the new savings,
2. Cancel all store cards (the points are not worth the risk),
3. Keep only one credit card,
4. Pay the balance of your credit card each month,
5. Create new spending habits and ensure the whole family takes responsibility,
6. Plan a budget and stick to it,
7. Review what caused the problem to begin with and be ever watchful in the future, and
8. Act quickly when you see the first signs of a problem.