If you find yourself in trouble financially, it’s natural to start searching for a way out. But before you can fix all your problems, you need to work out what’s caused them in the first place – otherwise they’re likely to happen again.
The root of the financial problems
It might be easy to blame that car repair bill or a broken-down washing machine, but nobody ever went bankrupt from a single home appliance. If you’re completely honest with yourself, you’ve probably known it was heading this way for a while. Maybe you found you had less and less money spare each month, then you started using a credit card to make ends meet, and it snowballed from there. Or perhaps there was a sudden change in your circumstances that meant you no longer had a spare few hundred dollars to pay that bill.
However you arrived in this situation, you need to acknowledge the following before you can move on:
1. You’re facing a serious problem.
2. There is no point blaming high interest rates, the economy or anything else. You are where you are, and it’s likely due to your financial habits one way or another.
3. You are not the only person to have ever been in this situation and there are ways out.
4. If you do get yourself back on track, you’ll need to make big behavioural changes (and stick to them) to make sure you don’t find yourself in the same position again.
All clear? Good.
Now, you need to work out what really caused the problem. Most situations fall into one of the following three categories:
An unexpected bill
A big bill can be the straw that breaks the camel’s back, but only if you don’t budget for it. If you’re smart with your money, you’ll keep a contingency fund so that unexpected expenses can be easily dealt with.
Quarterly or annual bills, such as rates and insurance, should be saved for in advance monthly/fortnightly/weekly so the money is already there to pay them when they arrive.
A rise in expenses
If you have a variable rate mortgage and the rate suddenly rises, it can be hard to find the extra cash – especially if you have other loan commitments as well. The only way to deal with this right now is to take a serious look at your expenditure and find ways to cut back. You could also consider refinancing your loan to get a better deal, but this should be carefully researched rather than an impulse reaction to rates rising.
Hindsight is a wonderful thing, but in future, you can save up for big purchases rather than buying with credit so you won’t have so many loan repayments to juggle if times do get tough.
A drop in income
Losing your job is bound to make things tough financially, but again you can plan ahead in your budget by having a contingency fund in case you find yourself without any income for a while.
It may also be that your overtime is cut or you lose out on a bonus you usually receive. If you rely on this money to pay your bills, this is a big problem. Overtime, commission earnings and bonuses should not be built into your core income as they are not fixed. Instead, you should budget without them and if you do get the extra money, put it towards extra loan repayments.
If you find yourself in real trouble, speak to your lender’s hardship team about arranging a short repayment break or temporarily lowering your repayments so you don’t start to fall behind.
Lay it all out
The longer you ignore the problem and let it continue, the worse it’s going to get. You need to write everything down so you can see how bad things really are and work out a plan of action.
No matter what led to the problem and how much debt you’re in, the only way to fix it is to start spending less than you earn so you can put more money towards paying off your debts. This is where budgeting comes in, and you can read all about that here.
Bearing in mind that the cause of the three problem areas identified above is not having any contingency funds, make sure you budget for some emergency spending this time around.
Start taking small steps to cut your expenses and, if you can, boost your income, and you’ll soon start feeling better when you see your level of debt decreasing. It won’t be easy, but it’ll be worth it!
To sum up:
- Financial problems generally build up over time and often stem from not budgeting and failing to save for unexpected expenses
- If you are having financial problems, you need to accept the situation and recognise that change is needed in your financial management
- It may be an unexpected expense, a rise in outgoings or a drop in income that makes your finances collapse, but these can all be softened by having a contingency fund in your budget
- To clear your debt and gain financial freedom you need to make a budget and spend less than you earn – it’s not rocket science but it does take some commitment