Get rid of the car and cards

Sarah is CEO of Wealth Enhancers and Grow My Team and author of Get Rich Slow. wealthenhancers.community

First things first. Liana has a great opportunity right now to change her financial future. Having just started a new job with a good salary, it’s a great time to utilise those extra funds to pay down debt and commence a savings plan. Liana is used to living on $42,000 a year and has really struggled, so with an increase in salary if she’s able to maintain her current lifestyle it won’t take too long to get ahead.

Every pay rise is an opportunity to fast-track wealth creation, for those of us willing to maintain our current lifestyle and not just spend the extra.

Assuming you have a FEE-HELP loan, after your rent you have around $3000 for repaying debt, saving a little and covering living expenses.

PREPARE A BUDGET

Completing a comprehensive budget to really get a handle on where your money’s going is the foundation for getting on top of your situation. For every line item in the budget it’s important to ask yourself how much you value that expense, and whether there’s any way to reduce it or cut it out (as you have done with reducing coffee purchases and cooking at home more).

DO YOU NEED A CAR?

I’ve used the Canstar car loan calculator to estimate your car loan repayments at around $750 a month. On top of that there’s fuel (let’s say $100 a month), insurance, registration and maintenance. The NRMA estimates that it costs between $100 and $300 a week to own a vehicle. If we assume $200 a week, that’s $866 a month. For simplicity’s sake, we’ll assume your vehicle costs around $1500 each month.

The question I’d be asking is, would a combination of walking, public transport and (limited use of) Uber end up being less than the $1500 you’re probably spending?

You would need to determine how much you could sell your car for, and what (if anything) would be left on the car loan to repay if you were to make this decision. It’s too late now but good to know for the future that borrowing money for a car is a no-go. The moment you drive away with your car it drops in value and from that day forward you owe more than the debt on the vehicle.

This I see as the biggest way for you to make some changes and reduce your debt substantially so you can start getting ahead.

CUT UP CREDIT CARDS

Credit card debt is costing in the realm of $600 a month – a lot. With rent, car and credit card repayments at this rate, Liana is down to just $1067 to cover all other living costs. We can see why she’s struggling. Expensive debt is crippling her financially.

It’s critical now to get these credit cards paid off as quickly as possible.

Before we go any further, cut up your credit cards. These little devils are the cause of so much financial stress to begin with, so it’s time to just stop using them altogether and commit to paying them off.

Next, go through your closet and home and find anything you’re no longer using or attached to that you can sell on eBay (or a similar website). Whatever cash you can free up and put straight on your credit cards is going to help immensely.

At the same time, applying for a low-interest or no-interest balance transfer may be another option.

Most importantly, pay as much as possible off the card with the highest interest rate first (even if a balance transfer is approved, it may not be for the full amount), and just stick to the minimum monthly repayments on the second card. As soon as one is paid off, move all repayments to the other card. As soon as you have paid it off, you can channel that money into savings and investments.