Managing a Debt Problem

Before you read on, I want to make you aware of a few key points;

  • There are many free services in New Zealand and other countries to help you deal with debt- more about that later.
  • Debt problems only get worse if you don’t address them.
  • If you are hiding your debt from your family, you know it’s a problem.
  • Never borrow more to get out of debt, unless you are consolidating your loans to get a cheaper interest rate to repay debt.

Debt Affects More Than Just You

If you live in New Zealand, or any other western world, debt has become a part of our society. It has become so easy to get into debt. We are bombarded with debt advertising on a daily basis.

Don’t be too hard on your self for getting into debt. New Zealand house holds debt has been increasing for decades. The debt to income ratio is now sitting at about 160%, and it’s still climbing. So you are not alone in having debt.

House hold debt levels in New Zealand from 1988 to 2018 Passive Income NZ

Dealing with debt

The first step on your journey is that you need to admit that your debt is a problem. You have to admit that you were powerless over debt and that your life with debt has become unmanageable. Only then can you deal with your debt.

Debt always has a solution, even if it doesn’t seem like it now. The size and number of debts you have might seem overwhelming, but don’t ignore them. The earlier you start to deal with them the easier it will be. You might feel like you will never become debt-free.

You can become debt-free, you just have to start now.

I’ve put together a debt management plan to try and help you deal with your debt. After all, debt will affect your entire life. You will never get ahead if you have a debt to deal with. It’s a real financial emergency that you have the power to deal with.

Has Your Debt Become a Financial Emergency

If you answer yes to any of the following questions then your debt has become a financial emergency.

  • Are you unable to pay for basics due to debt?

Does your debt repayments affect your ability to pay for basic needs, such as food, bills, and housing? Have your repayments exceeded your after-tax income?

  • Are you hiding your debt?

Are you hiding your debt from your family? from yourself? It’s common for people not to talk about money, but if you don’t know exactly the number and total value of all your debts you are hiding it from yourself.

  • Is your debt affecting your family relationships?

Are you hiding your debt from loved ones? Chances are it will be financially affecting them too. The best thing to do is to share it with them and make a plan together.

  • Are you stressed or ashamed of your debt?

Is your debt making you stressed? Are you ashamed to be in debt? Is it making you depressed when you think about the enormity of it all?

  • Do you have personal debt (excluding Mortgages)?

Some people may argue that having debt, as long as it is managed properly and not affecting your life is not a financial emergency. I say that any personal debt is an emergency.

If you answered yes to any of these questions you are in a debt emergency. And you need to start to take action right now!

How to Manage Your Debt

The following are some tips that you can use to manage your debt emergency. They might not be easy, but you need to employ some of them to get your finances under control. Your future self will thank your present self for it. And once you have your debt under control you can move onto making a plan to obtain financial freedom– if that is what you want.

Own Your Spending

People who have a debt problem generally don’t have a budget. Budgets are hard to set up and follow. Rather, track your spending instead. When you track your spending you will start to realize what you are actually spending money on.

You can track your spending using a spreadsheet, or even on paper. There are even free online options such as Pocketsmith that can help track your spending. They have options that can link directly to your bank account so you don’t have to manually enter each transaction in.

It’s only when you know that you are spending too much on certain things that you can cut them out.

Try to go for the big items first. The two biggest are housing and food. It’s not that easy to minimize your house expenses, especially if you own your home. Even as a renter, it can be difficult to move to a cheaper place.

But, if you are still struggling with the debt after you optimism your food expenses you might have to face the music and look for cheaper accommodation.

When it comes to minimizing your food expenses start off by not going out for food- don’t go out for dinner, or go buy lunch on your break. Not until you have paid all the debt off. Make home-cooked meals and bring lunches with you to work.

Cut Your Debt Costs

If you have credit card debt your probably paying too much on interest. Credit card debt has the highest interest rate around. You want to get the lowest rate that you can find.

There are a few ways to go about getting a lower interest rate. You could do a balance transfer to another bank’s credit card where they generally give you a year interest-free. You will need to have paid off your balance before the end of the year, otherwise, you will be paying the same interest rate as before.

Remember to cancel your old credit card if you go down the balance transfer route.

Or, you could consolidate all your loans into one. This is only recommended if the interest rate on the consolidation loan is lower than the interest rate on all your other loans.

Many financial institutions offer debt consolidation loans such as banks, finance companies, and even peer to peer lenders which can all generally give you a better rate than a credit card. Remember to read the fine print though.

Deal with the Issues

Try to find out why you got into debt in the first place. Was it because you wanted a new smartphone? new TV? new Car? If your debt is due to buying stuff then you need to be more disciple and realize you don’t need new stuff you can’t afford. Just cut it out!

If you got into debt to keep the lights on, and food on the table, that’s a different story.

Ask for Help

There are many places you can turn to for help dealing with debt. The Financial Capability website can put you into contact with free debt advice all over New Zealand. They can give you one on one counselling on how to deal with your debt emergency and help you in forming a payment plan.

Make a Plan

Write all your debts down, and the interest rate they charge, and the payment amount. Just like the table below. This will help you plan your attack.

Debt table. a method of visualizing all your debts and deciding how you are going to pay all the debts.

Now you know how much each loan is costing you, and how much you need every month to pay your minimum obligations. Always pay the minimum amount, otherwise, you will get stung by late payment fees.

You now need to direct that extra cash you found when you took ownership of your spending to one of these loans. But how do you decide which one?

There are generally three methods that you can employ.

The first way is to put that extra money towards the smallest debt. This will give you a greater sense of progress, as you will wipe away an entire loan much faster.

The second way is mathematically the correct way, that is to pay the debt with the highest interest first. This will save you money on interest, but it might not give you a sense of progress as paying the smaller one of first.

The third way as mentioned earlier is to consolidate the loans into one lower interest rate loan and to increase the minimum loan payment to as much as you can afford. You can consolidate your loans with your bank, or other financial lenders like Lending Crowd.

Final solution

When you make a contract with a lender, they are obliged to allow a person to apply for hardship relief. This is written into law under the Credit Contracts and Consumer Finance Act. However, the hardship has to have come from a reasonably unforeseen event such as a separation or death of a partner etc.

To apply for hardship with your lender, talk to them as soon as possible. You can’t apply for hardship if you are more than two months in default. And remember, this application doesn’t mean that your debt obligation will go away, it just means that you and your lender will sit down and try to work out a plan on how you can pay back your debt. Usually resulting in a lower repayment option.

If you are still struggling and you have exhausted all the options above you can apply for financial hardship. This allows you to withdraw money from your KiwiSaver account. But remember, your KiwiSaver money is for your future self. In essence, you are robbing your future self. So if you don’t tackle the reasons why you go into debt in the first place, you will likely end up in debt again in the future.

Remember- if you carry debt- you will never reach Financial Independence. And isn’t that the ultimate goal.

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