Use extra income to pay off debt

David developed a budgeting strategy and founded Simply Budgets, which has 25,000 subscribers, as well as the Spending Planners Institute. spendingplannersinstitute.com

Too many people really don’t know what is happening with their money but, Liana, you’re not one of them. You have taken some smart steps with your finances, particularly replacing your credit card with cash. When you spend real money, rather than a card, you tend to think twice and not spend as much.

The four savings areas that stand out for me are: Being paid monthly. What to do with your pay rise. Your social life on a tight budget. Your new car.

MONTHLY INCOME

Being paid monthly can be tough. The first month is quite an adjustment and it is easy to run out of money before the next pay day.

To deal with this you need a spending plan that gives you a crystal-ball view of your bank accounts. I have set one up for you so that you know what your ideal bank balance is for each day for the 12 months in advance. This plan includes a weekly living allowance so you always have money and don’t have to use credit.

Now that your income is increasing, carefully following a plan and ignoring the additional income will allow you to pay down the debt and save towards your property.

PAY RISES

You are now in your third year of living and working in Sydney and are starting to generate sufficient income to be able to fit in more of what you want. However, you have already recognised that as your income rises it would be very easy to fall into the trap of allowing your cost of living to be determined by your income. I have yet to meet a person who received a pay rise that solved their financial problems. Earning more is great but it is not the solution people think it is.

I would use your pay rise and bonuses to pay down your credit card debt in the shorter term. Then I would continue to live a “beer lifestyle” on a “champagne income” so you will find yourself in a position where you can have more and more of what you want without the stress.

SOCIAL LIFE

Given your age, it’s not surprising that one of your biggest frustrations is not having more money for your social life. You can easily spend the equivalent of a week’s grocery money on one dining out experience so the key is to put your spending into perspective to make sure you get value. Always consider how many hours’ work it took to earn the money you are contemplating spending and weigh up what else it could buy you.

NEW CAR

Buying a new car was a goal for you and it was great you went after it. As a general rule, I recommend people should spend around two months’ income on a car. My advice for someone just starting out is to buy a popular older car, probably with a few scrapes and scratches but still reliable and good for a number of years to come.

Fortunately, you have a buy-back agreement based on an estimated kilometre usage and you drive less than expected so you are likely to receive more than the contracted amount back. In the meantime, though, you are paying a considerable amount each month for a car that perhaps you can do without.