7 Tips to Get Rid of Debt in NZ
Thousands of New Zealanders are currently in debt;
And although some debt may be normal – getting over-indebted to the point that the majority – if not all, of your monthly income, is used to pay off debts then it’s time to change your game plan.
No matter what anyone tells you – every single debt (other than your mortgage and), in certain cases, your car loan – is labelled as bad debt that needs to be cut off pronto.
It’s so easy to find loans in NZ, there are literally hundreds of micro lenders and it’s quite easy to get caught up in a web of debt – but the way out is never as simple.
There is no easy way out of debt
The way you got in is never the way you get out so, be prepared to give this endeavour your all because that’s what it’s going to take.
If you’re drowning in short-term debt, your situation will certainly differ from that of someone whose debts lie primarily in the long-term form. It’s common knowledge that each and every person is as unique as the debt situation they find themselves in however, the fact that the process of getting out of debt is just as unique for each individual certainly isn’t.
There are many different strategies and approaches to dealing with debt and these strategies will not work equally well for everyone.
It all depends on what kind of debt you’re in, how much debt you’re in, your level of income and your individual personality.
If you have a serious problem with debt because you struggle to prioritise expenses and end up overspending on things that you don’t really need; you’re in a different boat to someone who has just lost their job and no longer has the ability to pay for the essentials.
The key to a successful battle against debt it to do something about it right away and, ensure that you follow through with your plans and remain consistent.
Whatever your unique situation, the following 7 tips will certainly go a long way in helping you organise, manage and eventually, rid yourself of bad debt.
1. Don’t Take on More Debt
One of the biggest mistakes that people make is assuming that their need for a loan is urgent and that paying it off will be an effortless process that will be over in no time.
It is a very rare occurrence that a borrower will take out a single, short-term loan, repay it on time and never go into short-term debt again.
Once you get into the habit of taking out short-term loans to tide you over till the next payday, you’re likely to become a regular customer for many of the worst (and most expensive) microlenders. Do not fall victim to the fly-by-night lenders offering loans for bad credit; this type of lending will only serve to worsen your situation so, if you absolutely must get a loan using a reputable provider such as Loansmart, Wespac, Max Loans, any of these reputable providers.
If you’re really committed to getting out of debt you need to do whatever it takes to ensure you don’t take out another loan – for as long as is necessary to clear your current debts.
Considering taking out another loan?
Perhaps to pay off an existing one, you had better stop and re-evaluate the reasons that you’re doing it. I guarantee you that the reason you’re looking to take out that loan is probably not a cash emergency by any definition of the word and, if it is, you should be looking at alternative ways of dealing with the situation or, getting hold of the money you need to resolve the emergency.
If your problem isn’t with short-term debt as we’ve spoken about above then it may be in long-term debt such as a mortgage or car loan.
If you’re struggling to pay off these debts then it’s even more critical that you ensure you don’t take on any more debt. If you cannot, for whatever reason, continue to pay your debts then you certainly need to approach your lender and inform them of your situation.
They may consider allowing you to enter into a temporary grace period, so that you can resolve whatever is causing you financial struggle or, perhaps, regain your previous level of income.
If you’re still up-to-date on all of your payments and just want to get out of the debt you’re in a little faster then it goes without saying that this point still applies to you; to get out you simply have to stop going in.
2. Start an Emergency Fund
It’s time to put some money away into an emergency fund.
The thing that debtors neglect to understand is that if you’re short on money and need a loan, particularly a short-term cash loan, then something is very wrong with the way that you’re managing your money.
You should, regardless of how much you earn, be able to cover an entire month’s worth of expenses (including your home and/or car loans) and then have some left over to add to a savings or retirement account.
This may be hard for people who live paycheck to paycheck however, it’s one of the most crucial steps to becoming free of all the modern financial burdens that plague so many.
If you simply don’t make enough money to cover all of your expenses then you should certainly not have been provided with a loan in the first place – so it follows that your monthly income must have dropped for some reason. If this is the case then the only way to resolve the issue is to regain that level of income; if you’ve lost your job - you’ll have to find another and if you’ve suffered from a pay cut or have a business that isn’t doing so well, the only reasonable solution is to work on solving that issue first and foremost.
Once you’ve managed to raise your level of income to adequately cover your living expenses and debts then it’s time to put some money away into an emergency fund.
It's like a savings account
An emergency fund can be equated to a savings account except that it doesn’t generate any return and is there merely to provide you with sufficient money to get through an emergency.
You should have an emergency fund that covers you for a period of no less than 6 months – which would be able to cover most cash emergencies and ensure that you never have to take out a high-interest loan.
3. Prioritise your Debt & Repay It Accordingly
Most people that are in some form of debt have probably heard someone say that it’s important to pay off the most expensive debts first and, this is absolutely true.
First, prioritise your high-interest debt
Your most expensive debts are the ones where you’re being charged a high-interest fee and/or expensive penalties and fees. This is usually in the form of credit card debt, retail store accounts and personal loans.
These are short-term, high-interest debts that many people are now getting into by taking out online cash loans that cost you a lot more than other debts such as your car and home loans.
You need to make a list of all your debts
Write down how much you owe in total, and what the interest rate for each specific loan is and then prioritise them based on which ones are charging you the most in interest and fees. These “expensive” debts are the ones that you need to focus all your time and energy on paying off first however, do not overpay these unless you can pay the minimum payments on each and every debt on your list.
Secured debts are priority debts & should always be paid first
Secured debts are debts where you have put up collateral, usually in the form of property, to secure the loan. It follows then that if you don’t make your mortgage payments you’ll lose your home, which is not a situation anyone wants to find themselves in particularly if you’re close to retirement or don’t have any retirement savings.
As you probably already know, unsecured, short-term loans like credit cards and “payday” debt are the most expensive debts that you can have.
Making these your top priority and paying them off as soon as you possibly can (provided that there are no early repayment penalties), should be your number one goal.
4. Create a Realistic Budget & Stick to it
If you don’t have a realistic budget then any effort to get out of debt will be in vain;
You cannot get control over your finances without first, understanding your position and secondly, using that understanding to make your money go further.
A budget will also give you a really clear picture of whether you’re spending more than you can truly afford to. For instance, some people may find that their entire month’s salary isn’t enough to pay off all of their living expenses and debts which is an obvious indication that they’ve lost control.
If this is the case, your first priority should be to contact all your creditors and arrange less strenuous payment plans that you can actually cope with.
Create a list of realistic goals
It is advisable to create a list of goals, starting with the short-term ones like; paying off both of my credit cards and increasing my emergency savings by 10% by March.
You can then proceed to make a list of long-term goals such as, paying off all my debts apart from my mortgage and car loan and having 6 months' worth of living expenses in my emergency fund.
Create a list of monthly expenses
Once you’ve done this you need to list all of your monthly essential and non-essential expenses and then review them to see where you can make some adjustments. If you spend a lot of money on purchasing clothes, eating out or entertainment you should cut these non-essential items out so you can free up some money.
This money should then be used to pay off the debts in order that they appear on your debt priority list.
If you find that you have a surplus after adjusting expenses to meet your new financial goals, this money should then be used to over-pay some of the high-interest debts. This will ensure that you can repay them faster and if nothing else minimise the damage to your pockets.
If however, you do not have an emergency fund, any extra money that you may have must be put into your emergency fund. Use the debt priority list to ensure that you don’t forget to include any of the repayments in your expenses column.
A good budget will always be a realistic one
Don’t cut out all of your usual non-essential expenses completely as you’ll just end up breaking your budget which will only serve to discourage you. On the other hand, if you spend less than you estimated you can use this surplus to make extra payments towards your debts or to add to your emergency fund, as discussed above.
If you’re having trouble working out a budget then you should contact a budget advisor who will be able to help you every step of the way.
The best place to search for one is with the Citizens Advice Bureau or the New Zealand Federation of Family Budgeting Services; these organisations are non-profit, reliable and have the expertise to provide effective and efficient assistance.
5. Seek expert advice
It’s always a good idea to seek expert counsel, more specifically, a debt reduction specialist or financial counsellor.
When you’re in a difficult financial position it may be hard for you to see things for what they really are to the point that you may not even have the ability to take a realistic look at your situation because you’re so deeply invested in it.
Even if you’ve not skipped a single repayment and still have control of the situation, you may be feeling that it’s only a matter of time before something happens that will send things spinning out of control.
The financial experts will suggest suitable solutions
These independent professionals will be able to provide you with an unbiased evaluation of your debt situation and suggest suitable solutions.
They may also be able to negotiate better repayment schedules and agreements with your creditors so that the damage is minimised. Be careful not to confuse a debt consolidation organisation, which will charge you fees for their services, with a financial counsellor who will offer you their services for free.
Look to your family for help & support
In addition to seeking out professional help, you should also look to your family for help and support particularly, your spouse or partner, who needs to be on board if any real, long-lasting changes to your debt situation are to be made. If you haven’t confided in your family with regard to your debt situation it may be a good idea to do so; a parent, aunt or uncle that may have good knowledge about financial matters may be able to sit down and work through your debts with you.
This will not only ensure that you do a thorough job of organising your debts but will also provide you with the emotional support and motivation that you need to see things through and stick to your plans.
You may think that the first place anyone would go to for help is their own family however, this couldn’t be further from the truth; people would rather go to a complete stranger and ask for money than ask their own family.
This is usually because people feel that their families would be disappointed if they found out about their financial hardships.
It is not only a lot safer to borrow money from family it’s a lot cheaper too since it’s unlikely that your family members would charge you absorbent interest rates and penalty fees. If you’re up to your neck in debt and want to avoid paying severe penalties or, possibly losing your home you should certainly turn to your family for help.
Just ensure that you use the money you’re borrowing from them to make a real difference to your debt situation and not merely tide you over for a short period of time.
6. Consolidate your debt
Another possible solution is to consolidate your debt.
This entails taking out a large personal loan that will enable you to pay off all of your smaller debts. This is not an option that should be taken lightly since it’s entirely possible that it could worsen your debt situation.
If you have more than three separate, unsecured debts and are struggling to manage them, then this could be a viable option however, do not consider it if you’re struggling to pay your long-term, secured debts. This is because you’ll simply be combining all your loans into one bigger loan and, should you be unable to make the repayment, you could lose everything.
Another reason not to consider this in such a case is that large loans usually carry lower interest rates and a consolidation loan may combine all the debts and then ultimately force you to pay a higher overall rate. Generally, your debts should be incurring excessive interest, penalties and fees for a debt consolidation loan to be of any benefit.
There are many service providers like ANZ Bank, ASB Bank and KIWI Bank that offer loan consolidation products and, it’s certainly better to approach these reputable companies when your financial well-being is at stake. Before opting for a debt consolidation loan you should ensure that you’ve exhausted all other options and have at least, received advice from an independent third party like a financial counsellor.
If the reason that you’re struggling to cope with your debt is that you’ve suddenly experienced a major blow to your income, perhaps from losing your job, you may be eligible to apply for a hardship provision with your creditors.
A hardship provision will practically force your creditors to assist you in minimising the effects which result from a loss of income and allow you to negotiate smaller minimum repayments, a grace period or a settlement agreement. Before going to such lengths it will be worth your time to simply contact each of your creditors and try to get them to extend a grace period, reduce the minimum repayments or, agree to receive a lump sum of money to completely write off the debt.
A hardship provision is only valid under certain circumstances and, if you meet certain basic criteria but, if your creditors aren’t playing nice – it may be your only option and, one that you should take if it means that you can keep your head above water.
7. Increase Income & Use Bonuses to Repay Debt
This is probably the most underestimated and least-desired approach to getting out of debt but, it’s also the most effective.
Most people easily realise that they need to cut down on their expenses to make sure their debts can be paid off but why not consider increasing your income?
Whether you can’t make your minimum repayments or you just want to get rid of the debts you have for the sake of financial freedom and peace of mind, increasing your income will certainly help achieve your goals.
Why not take a bad situation and use it to move forward?
You could go after that promotion you’ve been eyeing for years, ask for a well-deserved raise that you’ve been putting off, start a part-time business or get a part-time job.
If you have no intention to commit yourself to an increased workload in the long term you could consider having a garage sale or taking one or two temporary jobs just to get you that extra income you need to regain the balance of your finances.
The internet also makes it possible for us to do work that generates an income without ever leaving the comfort of our homes. Whatever endeavour you choose to pursue, make sure you put the money to use in the most effective way
This means that you need to be mindful of becoming overeager and causing your debt-busting to go straight back to where it once was.
When you get your quarterly, annual or commission bonuses you should certainly use the money to pay off your debts. This may seem like a complete waste of your work and efforts, it you’ll be grateful you did it late on.
It’s also worth mentioning that paying off debts will always take priority over saving since you’ll never be able to earn as much interest on your savings as you’ll be charged for the same amount of debt.