We all know how easy it is to get into debt and how much harder it is to get back out. Many of us are hitched to our own debt wagon, dragging it along with no end in sight. But how do you make the leap forward from living on your credit card, your overdraft or your revolving mortgage to being debt-free? It’s certainly not the simplest transition.

It’s an entire change of lifestyle.

Living in overdraft

In one of our seminars last year, a Dunedin student shared her goal to get out of overdraft for good. It was a hole she couldn’t seem to get out of each month – she never seemed to have enough to climb out entirely.

Staying in overdraft each month was probably costing her between 12–19% interest for every dollar she used that was not her own. But how to make the switch?

Exiting the revolving mortgage

Even those with a much higher net worth are hooked on revolving mortgages – relatively cheap money that allows them to easily borrow against their house for a trip here, a new car here. But does that arrangement make it that much easier to spend more than they intend? And how much does it all cost over time?

That mortgage balance still needs to be paid eventually, especially to be freehold by retirement, which is certainly something to aspire to. What goes up…

Living by the card

For years all my expenses landed on my gold card. Like all credit cards, it certainly made it so easy to spend more than I planned. (If I planned at all, that is. What I definitely planned on doing is somehow covering the balance at the end of the month – if I could. When I couldn’t, things got expensive.)

With credit cards, people spend 30% more than they would if they used cash, according to Dr Ted Klontz, author and expert on financial psychology. And it’s so easy to treat our credit limit as if it were our own money.

Happily, I stick to ‘real money’ for my spending these days, but it sure took long enough to ditch the debt wagon.

Missing that monthly ticket

A few months ago I stopped in at my local petrol station to buy my monthly train ticket. In my case, the monthly ticket is close to $100 cheaper than if you bought a 10-trip ticket each week.

Now it turns out the lady at the till is somewhat of a personal finance guru herself. (For all I know, she may own a part of the station.) She told me how she had urged another customer to go for the monthly ticket to save that $100. He was stuck on the 10-trips and never had enough money to buy the more expensive – but in the end cheaper – monthly ticket. He was living from pay to pay.

She told him what he needed to do: put aside $20 a week until he had enough to afford the ticket. She even offered to hold the money for him! No luck.

How to leave the wagon behind

All this borrowing means we’re living in the past, paying back other peoples’ money for past expenses. And the debt is a drag on real wealth that we might be building for the future.

My petrol-pumping guru’s advice to that 10-tripper is actually the key to ditching the debt wagon. Following her advice, putting aside a savings cushion, gives you the option of no longer borrowing to get by. That’s a great option to have.

Even if you have to start small, say just 1% of your income, you can slowly build a fund to tap into and have an alternative to borrowing. By paying yourself first after each pay into a separate savings account – if you can, make it an automatic payment – you can help your finances leap forward instead of always paying back the past.

Admittedly, turning your finances around like this takes time and patience. But remember this is an entire lifestyle change – for the better.

Not all debt's a drag

Of course, Sorted is not necessarily out to erase all forms of debt – consumer credit can certainly be used to your advantage. Smart debt for things that increase in value like education, property or a business can get you moving forward in the right direction. Dumb debt, on the other hand, should be avoided like the plague. Yet for any debt there is a cost, and you can always bring up our debt calculator to figure out how much more you are paying when you borrow.

 

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