Do I save or do I pay off debt?
In 2016 we had 3 maxed out credit cards, $20,000 between them and we were only paying the minimum repayment so as you can imagine they were not going away anytime soon.
It wasn’t one big thing that got us here, it was a series of small things that created one big financial mess, a combination of being sleep deprived parents (2 young kids), single income, a new mortgage, an additional car loan and living in survival mode with no plan - it was a recipe for disaster.
So my lesson and what I have been sharing since then is, make a plan, it doesn’t have to be perfect, you can tweak as you go BUT you have to start somewhere.
Get to know your debt, it might be uncomfortable and confronting but get to know how much your debt is costing you.
Here are 4 things you need to know about your debt:
How Much do you owe?
What is the interest rate?
How much are you paying?
How long will it take to pay off?
So back to the question “Do I save or do I pay off debt?
Now, at different points in my journey I have been on either side of this.
When we were paying off our debt we focused on that and not saving, we paid the minimum and then added on the extra from the surplus we had. Meaning we made sure we were meeting all our requirements in debt repayments and living expenses and what we had left over we threw on one of our debts. We had also sold our car that we had the loan payment on and lived with one car.
There are two debt reduction methods you can choose from when paying off multiple debts:
1. Snowball Method
This is where you pay off your debts in order of the balance, starting off with the smallest balance first to get that quick win up front.
2. And the avalanche method
This is where you pay off your debts in order of interest. Starting with the highest interest first.
We personally chose the avalanche method as we had a pesky credit card with ridiculous interest rate on it so wanted that one out of the way first. Once we paid that off we could throw that amount onto the next card.
Since being a mortgage adviser, I also see the side of needing to save as well as paying off debt, and how you can feel pulled from one to the other.
If you are wanting to buy your first home, a mortgage adviser is going to tell you two things.
1. Pay down your debt
2. Save money
So the dilemma is How do you do this without living on 2 minute noodles.
Yes, you can do both, because they are two completely separate muscles you are flexing. Yes it is going to be hard but when you have a strong vision you can do anything.
This is why your cashflow plan is important. First, you need to know what you are working with.
If you have a surplus – how can you increase this?
If you have a shortfall – how can you reduce this?
Ask yourself this question, where in my life at this moment could I let go of something to bring abundance in the future, what changes can you make now to increase your wealth for your future self?
You have to own this debt, you are in charge of making the change happen and bringing your vision to life. Start taking advantage of opportunities.
For your savings, what can you do to support the growth of your savings? Look at different savings accounts, which one gives you the best interest rate? What investment strategies are out there to build your savings over the next 5, 10, 20 years?
A small ( but profound and important) step to take is asking yourself these key questions:
What are your short medium and long term goals?
How are you going to measure your goals?
How much debt do you have?
When do you want to have it paid off?
How are you going to make sure you are not in this situation again?
How much savings do you want?
When do you want to have it in your account?
The Healthy Wallet Project is a 6 week cashflow confidence program. You will walk away with a clearer understanding of what it is you want to achieve, a clear idea of your goals and a cashflow plan that aligns with the life you want to create.
If you would like to start building your healthy wallet today or would like to learn more about the program we have created fill in the form below and I will be in touch