How you manage, spend and invest your money can have a profound impact on your life.
Too many people make it well into adulthood without learning how to manage their money effectively, meaning they can sometimes miss out on things they want to achieve.
If your money isn’t managed effectively, bad debt can quickly creep up on you and spiral out of control.
The problem is many people have bad debt that is not productive - such as credit cards, car loans and personal loans - that can impede any plans to create long-term wealth for your financial future.
Below are three common scenarios we come across time and time again that negatively impede your wealth.
Paying everything off at once
This one is a doozy because what may seem like a good idea actually slows you down and negatively impacts on your understanding of your debt.
By trying to pay off all your debts at once, you only see a slight reduction across a number of debts.
Psychologically, this can be very detrimental as there seems to be no traction in reducing the amount of debt that you are paying off.
It’s a much better idea to focus on one debt at a time. Then you will have a clear ‘win’ once it’s paid off.
Once you have paid off your first debt, you should channel all the funds you were using to pay off your first debt into your second debt. This will dramatically reduce the balance, creating a snowball effect to the overall reduction.
As you pay off each debt you can readjust your budget accordingly and very soon you’ll have all your debts paid off.
Repaying the minimum amount on your refinanced loan
If you have just refinanced and have secured a loan with a lower interest rate, make sure you don’t just pay the bare minimum on the loan.
If your previous loan had a higher interest rate, you should be paying the same amount as you were into your new loan.
This way you won’t spend the extra money on something frivolous and you’ll be paying down your loan quicker.
Also make sure you take into consideration how much time you have remaining on your loan.
You may have had your existing loan for five years and only have 25 years remaining. When people refinance they often forget to take this into consideration and refinance with a 30 year loan.
If they then start paying off only the minimum amount, they are basically in the same place they were five years ago.
Having a monthly budget only
If you have a monthly budget, well done! But don’t stop there.
A monthly budget is great for getting a micro picture of your spending but it’s vital to create an annual budget as well.
An annual budget shows you the ‘big picture’ on your finances and where you can readjust your monthly budget as you go along to save and spend better.
But keep in mind a budget is just an estimation of some of your expenses, such as food, transport and entertainment.
It is a good idea to go over your statements and receipts from last month and compare what you thought to what you actually did. This way you are consistently adjusting your budget to reflect what is actually going on in your life.
Some simple adjustments can go a long way to getting your debt down and taking control of your cash flow so you can keep building your portfolio.
If you’d like to talk about some debt-minimisation strategies to start managing your money better, get in touch. Call Kelby on 1800 600 890.