Bitesize: Help me get out of debt!

Alec: [00:00:07] Welcome to Bitesize on Get Started Investing In this series we feature some of our favourite lessons, quotes and moments from the podcast. If you'd like to listen to the full episode, we've included the link in the show notes.

Bryce: [00:00:24] Anyway, the next question that comes in, Ben, is what are some of the best tips to help me get out of consumer debt that I racked up at university? We've all been there. 

Ben: [00:00:35] Well, first, I think it's important to sort of define what consumer debt actually is, because some people might not know that. So consumer debt refers to the sort of debt incurred by individuals for personal or household consumption purposes. So taking out debt to acquire everyday expenses for major purchases, things like credit cards, personal loans, car loans or buy now pay later services, which is quite popular these days. So in terms of those debts, what are what tips to help me get out of them? I guess the first mistake I see a lot of my clients do is is solely focussed on paying down their consumer debt first at the expense of generating something like an emergency fund or cash reserve. I always advise my clients to build a cash reserve first before paying down their consumer debt because the issue is that you're going to make some progress paying down this consumer debt. But then if you sort of hit with any other unexpected costs, so you might break down, you've got some sort of medical issue or you've got one of your pets get sick, then you don't have any other savings to rely on to pay those expenses. And then you're just forced to rely back on other consumer debt. So taking out more credit cards and you just get in this sort of debt trap. So so I think the first thing is to make sure that you've got a cash flow plan in place. You're spending less than you earn and then you sort of get that buffer initially. So that might be five or ten or 15, 15 grand. And then you focus on paying down that consumer debt from there. I guess if you've already got that financial sort of cushion in terms of a cash reserve that you sort of stuck with this high interest debt that's accumulating over time. I actually had a client last week and she had sort of one of these payday loans and the interest rate was 49%. Oh, what's inside? She was just paying $100 a week to do this. And it was just interesting. It wasn't paying it down. So I guess in that case, you could look at something like a balance transfer on a credit card that has an interest free period. So that generally 12 to 24 months where you can take over that debt with a new credit. So try it out using this balance transfer on a credit card. What you just have to make sure is that you're not making any new purchases on the credit card because the new pictures touches my. Yeah. Accrue interest and payments might be allocated towards the balance transfer amount first so that you're just going to start drawing interest on the new purchases. So you only just use this as a way to clear that existing debt and then pay it off within the interest free period. So that's one strategy. But I mean, you've got to be careful with, I guess, making sure that you're doing it correctly and you've got the ability to obtain a new credit facility. 

Bryce: [00:03:26] Yeah, the first point was an interesting one. I think when you're leaving uni and if racked up a few days on the credit card, you're not likely to have an emergency fund or a buffer cash. And the psychology of wanting to pay that off first before, you know, building that emergency fund, I think is one that people would grapple with because, you know, you don't, you just want to get rid of that debt, but you can understand how to get in that trap. If things do pop up, you don't have the cash that you keep relying on it. So it's some good advice. If you enjoyed that bite size, you'll find a link to the full episode in the show notes.