Being in debt can be stressful and expensive – and can affect your mental health as much as it does your wallet.
Having a spending plan is an effective way to relieve yourself of the burden of debt. If you’re feeling the financial pressure, this type of plan can help you to think positively and measure your progress towards being debt-free.
When it comes to managing debt, planning ahead is a key factor. Keep reading to learn how a spending plan can help you pay off debt.
Here’s a step-by-step guide on how to create a spending plan that will work for you.
1. Work Out How Much You Owe
Firstly, you need to figure out exactly how much you owe.
If you have lots of loans, it can be difficult to trace all the accounts and the paperwork. But you should be able to work out how much you’re paying each month by looking at one of your recent bank statements.
To get a better idea of how much you actually owe, taking a look at your credit report can be useful. There are 3 credit reporting companies in New Zealand, and it’s free to request a copy of your credit report. However, if you want it quickly, you might have to pay a fee.
Once you’ve got this in hand, you can add up all your debts to find out what you owe in total.
2. Prioritise Your Debts
When working our your spending plan, you should keep an eye on which loans you have with the highest interest rates.
You should normally prioritise payments for these loans. Unless they are very small amounts, they will cost you the most going forward.
Your spending plan should include these payments as part of your monthly costs.
If you have any ‘leftover’ money at the end of the month, consider making extra payments towards your high-interest debts.
Or if you’d incur an early repayment fee for doing this, put it towards other debts to get started on them sooner rather than later.
3. Consider Consolidating Your Debt
It’s easier to keep track of your spending plan if all of your debt is in one or two places, rather than many small loans.
Debt consolidation is where you take out a new loan to pay off all your old loans. This doesn’t decrease the amount you owe, but it might stave off higher rates from your old loans.
It is mostly useful simply because it’s easier to keep track of debt when it’s all in one place rather than scattered across several accounts. This also saves you the job of prioritising your debts.
If your credit report has some black marks on it, you may have some trouble convincing lenders to offer a consolidation loan. But if you explain the situation and demonstrate that you’ve got a sensible spending plan to back up your application then you may have more luck. It’s ultimately up to them though.
4. Creating Your Spending Plan
A spending plan is essentially a household budget that takes into account the effects of your debt repayments over time.
Create a list of all the things you normally spend money on during the average month. Then go through your bank statements and figure out exactly how much you’re spending.
This should be very comprehensive, including your insurance payments, food and utility costs, all of your loan and mortgage payments (or rent), and the taxes you pay too.
The next step is to start cutting out some of the luxuries. Have a really close read of those statements. Could you go out to bars a little less? Do you spend too much on clothes? Or is eating out too often your financial downfall?
Do you have Sky TV or other cable services you could live without?
We’re not saying you have to live like a pauper, but you’ve got to be realistic about what you’re spending your money on. Without cutting down on your spending, the chances of paying off your loans anytime soon becomes fairly remote.
5. Shopping for Essentials
After cutting out the luxuries from your spending plan, the next step is changing your shopping habits for essentials.
By this, we mean things like food, drink, and clothes. Though if you can also switch to a cheaper mortgage or utilities, by all means look into this to free up a bit of extra cash.
When you’re out shopping, do you normally go for branded products? Taking a step down and buying the store-branded products instead can save you a huge amount of money over the course of a year.
They’re not normally any worse than the branded products, either – that’s the power of marketing for you. And remember that eating at home is a lot cheaper than eating out.
You may also need to buy new clothes while you’re paying off your debt. That’s fine, but have you tried charity shops or sites like eBay or Gumtree before buying full-price products?
You’ll be surprised how much you can save following these simple steps. And you can then use that money to help pay off your debts.
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Debt and Spending
There’s a fairly obvious relationship between how much we spend and the debt we accumulate. If you spend more than you’re earning, you’re just creating a problem and pushing it into your future.
Too many loans and too much debt can damage your chances of getting a mortgage in the future, and cause you an incredible amount of stress.
If you’ve built up too much debt to deal with, it’s important that you go and talk to your lender. All reputable lenders are happy to listen to your concerns and may be able to negotiate better terms with you.
For example, they might be able to move you onto a cheaper rate, or allow you to pay lower monthly payments while you pay off other debts.
They may even be able to freeze your debt to help you out, but refuse to lend you any more money until your account is settled. So it’s a fair solution for everybody.
With a good spending plan in hand, and an understanding relationship with your lender, you should start to see a difference in your debts in no time at all.
And when all the pieces start falling into place for you, don’t forget to come back and share your experience with us!