Use ex­tra in­come to pay off debt

Money Magazine Australia - - ASK THE EXPERTS - DAVID WRIGHT

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.

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