Many people facing financial pressures only make things worse by trying to dig themselves out.
Here are our tips to avoid the consequences.
Are you drowning in debt? Or is it just lapping at your ankles? Chances are, however well you manage your money, you’d like to owe the bank less. Trust us you are not alone, with many Australians stuck on the endless merry-go-round of debt that keeps piling up.
The bulk of personal bankruptcies in Australia are for relatively low-incomes and debts normally derive from credit cards and personal loans. ASFA figures from recent years show 75 per cent of people who go bankrupt earn less than $58,000 a year, yet the majority of their debts range from $20,000 to $110,000.
From we stand it kind of begs the question of how did that happen? What we believe is that there are a lot of people who take advantage of things like credit card transfers and try to consolidate their debt but don’t actually do anything to reduce it. The triggers to bankruptcy include loss of employment or illness that prevents people from going to work to earn their wage. Here we say that income protection insurance is a vital strategy to ensure you don’t end up as another statistic!
While rising debt is an issue for many, there are small steps people can take to reduce their risk.
Face the problem
Firstly admitting you have a debt problem is the hardest step. It is too easy bury your head in the sand, especially as the bills pile up, but you need to be clear on exactly where you stand. Make a list of all your debts so you are clear on how much you owe.
When facing financial pressures you need to draw up a budget that outlines their spending and identifies solutions to free up income to put towards paying off debt. Paying off the smallest debt first to give yourself a psychological confidence boost. Alternatively pay off the highest interest facility first as this will save you the most interest in the long run.
Taking action early as possible is essential. Interest is the real killer with debts, especially credit cards. When things go pear-shaped the temptation is to ignore it and hope it goes away. But with credit card interest your debt can quickly get out of hand.
It is essential people begin paying more than the minimum amount required to start slashing their debt. If you have a credit card and you’re making the minimum repayments you’ll be potentially paying off that debt for the next plus 40 years for as little as a $3,000 debt.
The impact of bankruptcy is very profound. If you’re unfortunate enough to declare bankruptcy you’ll be placed on a public register of insolvency and your credit record will be tainted. If you earn more than $50,000 after tax you will be required to make contributions to pay back creditors.
To avoid the fall you need to take stock of their finances and access our financial advice services. Remember that you should not assume that taking on more debt to pay off your existing debt is really going to help you in the long run.