With the amount of cheap consumer credit that is available in the current environment, it can be easy to lose control and have a big debt hanging over your head.
While this can seem overwhelming at the time, the reality is that with a solid framework you can work out the best solution to becoming debt-free in no time.
The first step should be to seek professional help which may be in the form of a financial advisor or even the many hotlines available for those struggling with their debts.
With this in mind, I’ve outlined a few simple steps that can help you to build out your own debt repayment plan and get you back to investing in the ASX.
Following the “highest to lowest” principle
One of the hardest parts about being in debt is working out where to start, particularly given these debts will inevitably be increasing with interest in the meantime.
I’ve always looked to pay down the most expensive debt first, as this is what will be costing the most money in interest and making any debt burden larger.
For many in Australia, this could be a credit card balance which can charge above 20% per annum, but could also include third-party loans or financing for things like cars or other consumer goods.
If possible, refinancing these loans with alternative lenders can buy some extra time and reduce your interest bill in the meantime, and you can aggressively pay down the most expensive debt first, and work down the various steps from there.
Avoid the temptation to overspend
Once your debt is under control and you’ve hopefully reached debt-free status, the last thing any of us want to do is get back into our bad habits and need more lines of credit.
It can be hard to change our behaviours at the best of times, but the key to building wealth is avoiding “bad debt” like credit cards and only using “good debt” such as a mortgage sparingly to use leverage and increase our cash-on-cash return on investment.
Cutting back your discretionary spending here is key, but if the spending is necessary it could be worth using a ‘buy now, pay later’ service such as Afterpay Touch Group Ltd (ASX: APT) to gain easy access to consumer credit without the hefty interest bill.
Start investing only when you’re ready
While paying down debt can be confronting and not as fun as investing in your ASX portfolio, you should really be investing once you’re on a better financial footing.
It could be true that your return from your stocks is exceeding your interest bill from your debt, but on average this would seem unlikely and a very risky move to rely on investments to pay off your debt for you.
I’ve always found it best to wipe my debts clean first before looking to allocate more money towards those Wesfarmers Ltd (ASX: WES) shares which could be undervalued at the moment.
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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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