Every single day, as a Mortgage Broker, I say to myself “I wish more people understood debt and how to beat it”.
People contact me to buy their first home, and at least 50% of the time either their capacity to borrow is significantly lessened by their existing debt. Or, they are unable to borrow altogether because their total debt is actually more than their deposit overall and the banks are just unable to lend them money until they pay off what they already owe.
But I’ve already got debt - is all hope lost?
Absolutely not!
I judge no one for having debt, but it may restrict your ability to borrow for a home, and you’ll need to understand that for the shorter term.
Luckily I do have some strategies for eliminating that debt forever and getting into the best position possible for the future;
Don’t be scared - this is a great first step towards helping you achieve really positive things in your life. So approach it with a good attitude, and don’t feel bad about any past debt blunders.
1. Find out where your money is going
The absolute first thing you need to do is look at where your money is going and when. The easiest way to do this is to download three months of your bank statements from your online banking into a spreadsheet (or simply highlight the ones you get in the mail) and split it up into essential and non-essential expenses, like food/power/rent as opposed to buying coffee or big holidays. This can be a scary wake up call!!
2. Be Realistic
Once you know where your money is going, it’s time to set a realistic budget. If you have never done this, we have a template on our website you can use. I cannot stress enough that being realistic is going to get you so much further than being a scary matron wielding a big stick and living on 2 minute noodles, because if you do that you’ll be unhappy and more likely to break your budget and over-spend.
Be accurate with your essential expenses (unless you can trim them a bit by reviewing power companies or moving to a cheaper rental property) and then aim to reduce your non-essential expenses by ⅓ to ½ which will allow you to use that extra money to target more of your debt. Review this monthly and if you are totally smashing it, then reduce those slightly more. Always start with small steps and increase them once you’ve got the first wins and you’ll get a lot further!
3. Review your debts
If you have several, rank them in order of the highest balance to the lowest balance, and then by the highest interest rate to the lowest interest rate. You want to pay off the lowest balance with the highest interest rate first. This might seem a bit strange, but if you have several debts, completely eliminating one of them will give you a boost and you’ll be more likely to continue to pay off the others.
Then the next target is the second lowest balance and second highest rate. Usually, for most people this means paying off high-interest hire purchases or credit cards, GEM visas or Q Cards, and then targeting personal loans, and car loans. Make sure that when you have finished paying them off, you remove temptation by getting rid of the card or available credit balance.
Some banks intermittently offer “balance transfers” on credit cards. This can be helpful if you are struggling to make headway due to high interest, it can feel like a bit of a never ending treadmill! A balance transfer brings that particular debt down to 0% interest for a period of time which can help you to pay them off much faster.
4. Celebrate your wins
Execute your budget, and celebrate your wins! I find that reviewing monthly is a great way to check you’re on track. Don’t stress if something has fallen off the radar but definitely do encourage and reward yourself if you have done a great job. Make the most of your agreed non-essential spending and/or time with family or friends (or even alone time!) and have a treat! (Just not outside your budget or by buying something you don’t need!)
5. Treat yourself on the day you owe nothing
As always, nothing in life worth doing comes easy.
I'm often contacted by first home buyers who have recently paid off their last dime of credit card debt and are over the moon. They've done the hard yards in paying off their short term debt and are now ready for a great night out to celebrate - and then to look at buying their own home.
We're always here to support when you need it and celebrate along with you, so contact us if you'd like some help with managing your current debt and how to beat it, and together we'll make a plan to get you on the path to buying your first home sooner than you think.
Adam, Claire, Greg and the My Mortgage Team