Want to know how to pay off your debt in 2020?As we enter into a New Year, it’s natural to make a list of the goals you want to achieve in 2020. These can range anywhere from lifestyle to financial aspirations. If you are wanting to smash your debt in 2020 – or at least make a dent – read on.
Courtesy of the Australian Bureau of Statistics (ABS) the latest statistics show 29% of households have an excessive amount of debt. Suprisingly a whopping quarter of high-income households allegedly have too much debt. Not surprisingly, Sydney and Melbourne are ranked to have the highest debt stress – no doubt thanks in part to their skyrocketing property market.
Luckily, there are ways to get ahead of debt in 2020. The varying strategies will depend on your age and current financial situation. If you feel as though you are foregoing material things in the process, just think, every dollar you save is a dollar towards financial independence. Let it be your mantra.
How to get out of debt in 2020: In your 20’s and 30’s
This is usually when the initial debt trap is set. Thanks to payment plans such as AFTERPAY and ZIPPAY, it’s easy to underestimate your monthly spending. Financial advisors suggest staying away from any form of payment plan – if you want to buy something, assess your savings, then buy it outright. This will help to prevent overspending. If you have a credit card, try to set the limit to a maximum of $2000. This will prevent a catastrophic bill with high interest at the end of the month. This is the time to be learning sound financial habits. The only debt you should have is HECS-HELP after investing in your education and earning potential.
TIP: If you do have a personal debt, focus on clearing it as fast as you can so that it won’t bear weight later in life when you have more bills to pay!
“A really easy way to do this is to have separate bank accounts and automate where your money goes each pay. Have an account for day to day expenses, an account for periodic bills such as quarterly utilities and car rego and an account to save for a specific goal such as buying your first property and an account for fun stuff,” says FinFit’s Donna Sgangarella.
How to get out of debt in your 40’s and 50’s
In your 40’s and 50’s reducing your debt may look desirable however, in a low interest rate environment, you need to consider the opportunity cost of debt reduction versus investing into growth assets. Over time, this may deliver greater returns than mortgage rates.
If you do have debt it’s advised to avoid having funds sitting in an everyday bank or online savings account. This is because the earnings rate is generally lower than your loan interest rate and is also subject to income tax.
“A better use in most cases will be to hold the funds in an offset account, which reduces interest payable but still provides at-call access to the funds. An offset account is really a no-brainer if you have a home loan, as it is a simple and risk-free way to make your loan payments go further,” says Pennicott.
TIP: Maintain your loan repayments at their current rate even when the minimum amount is reduced due to lower interest rates.
Remember, this is a time when you will not likely be saving much money thanks to kids, mortgages and so on. Try to maintain the difference between good and bad debt. Good debts are investment debts that are tax deductible, particularly where the growth and income from the investment are more than the cost of debt. Bad debt includes consumer debt such as credit cards, buy now, pay later services and personal car loans.