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How to spend without getting into debt

Is it really possible to live within your means and still enjoy life? The answer is yes and with just a few important changes you can start spending less and lose the debt. 

From less than zero to savings hero 

Debt can be a really big drag on your finances. And yet borrowing to buy has never been so easy and accessible. With Buy Now Pay Later, you don’t even need to jump through the hoops it takes to get a loan or credit card. This makes saying no to your spending urges harder than ever.

Having debts – and adding to them over time – doesn’t just mean missing out on savings. When you’re paying interest on your debt, it’s like having an extra bill to pay. That makes clearing debts a win-win; because you’ll increase your overall wealth by reducing your debt, and you’ll improve your cash flow by paying less interest. If you pay less interest, you have more money to pay down your debt. 

The cost of instant credit

It's always going to be hard to say no to yourself now, for the sake of having more money in the future. Credit cards make it all too easy to give in and buy now, instead of just saying no or saving. But now with online shopping and Buy Now Pay Later (BNPL) tools like Afterpay, Humm and Zip, you can spend sooner without even having a credit card.

At first glance, BNPL is straightforward and can be a cheap credit solution – sometimes it’s even free. Some providers charge a monthly fee to have an account with them, some don’t. You’ll have a spending limit and you’re expected to pay back the cost of each purchase in instalments over a set period of time and there’s no interest to pay.

It’s a good deal when compared to the interest rates on credit cards. But if you miss payments, this is where problems start. You’ll be charged extra fees and the provider can report late payments to credit agencies. Plus, you may have a credit card linked to your BNPL account. If you miss scheduled payments they will be billed to your card, adding to a debt balance that charges you interest.

Why credit scores count

This brings us to your credit score and why it’s important. Credit scores – or ratings – are based on your borrowing behaviour. If you borrow money and pay it back on time that’s good for your score. Late or missed payments on credit cards, loans and bills are bad for your score. The number of applications you’ve made for credit or loans will also be used to calculate your score.

Your score is one of the things a lender will look at when deciding whether you can borrow money and at what rate of interest. If your score is lower they may still say yes to your application for a credit card or loan but charge a higher rate of interest. Or they may turn you down. This counts for mortgages too, so if you have plans to buy a home, keeping your credit score high is going to make a difference to how much you can borrow.

Visit Moneysmart to find out more about credit scores and how to check yours. 

The good and bad of borrowing

Borrowing money isn’t a bad thing. Very few people can afford to buy a home without a loan and if property values are going up and could continue to go up, borrowing to buy property could make even more sense. You get to buy an asset that’s building your wealth and live in it too, this is a debt that is working for you.

But when you’re borrowing money to buy everyday goods and services, like a new pair of sunglasses, you’re unlikely to be able to sell these in the future at a higher price. Plus, you could be racking up interest on a loan or credit card balance to pay for it, so you’re actually paying a lot more than the asking price. This debt isn’t working for you, it’s working against you.

Much of your day-to-day spending is to meet essential needs for food, health transport and more. Your other spending decisions are about enjoying a lifestyle that makes us feel comfortable, but are less necessary. When those lifestyle purchases are adding up to more and more debts over time, it’s worth asking yourself whether those choices are really making you more comfortable, now and into the future.

Debt disruptors

If you’re committed to getting on top of debts, changing your spending habits is essential. In the next topic we’ll be going in to a lot more detail on how to save more and spending comes into that too. But if you have debts that are costing you in interest and aren’t working for you, making them disappear needs to be your top priority.

Gen Frost from the IOOF team shares the three things you can try to shake up your spending, and change habits that lead you to buy more than you can really afford:

1. Understand your buying behaviours

You need to be aware of your retail tendencies. What are the situations where you’re most likely to spend money. Speaking for myself, I’m an emotional buyer and I’m far more likely to make an impulse buy when I’m stressed or feeling flat. The trick is to identify those times when you’ve bought something to feel better and remember that next time you’re following an urge to spend.

2. Hit pause on extra spending

If you’re someone who does a lot of shopping online – and let’s face it, during the pandemic that’s been all of us – then there’s a pretty simple hack you can use to get your buying under control. After adding something to your cart, simply wait for at least 24 hours before making a final decision to buy. This is a great way to test your real motivation for buying. Giving yourself a day to think about whether you really need to buy something tests how important it really is to your happiness.

If that doesn’t work, think about cancelling your credit cards for a time and having a dedicated account for spending on extras. That way you can’t get carried away and will have to stick to a fixed amount for treating yourself and your family each month.

3. Reward yourself

Shopping can give you a dopamine high – your brain feels rewarded when you buy something. And there’s no better way to break a habit than by replacing it with another. Instead of looking to shopping for your reward, focus on the amount you want to take off your credit balance each month. And when you’ve met that target three or four times in a row, reward yourself in another way, with treat that doesn’t cost much – think $20 rather than $200!

Three ways to send debt packing

As well as giving you the motivation to spend less, dealing with debts you’ve already got can take away a lot of stress. Living with big credit card and loan balances, and finding the money to keep up with payments every month, isn’t fun for anyone.

It’s going to take some discipline to get out of debt. But choosing one of these strategies can help you make a commitment, play to your strengths and keep going.

With the snowball method, you start with your smallest debt first and work your way through them in order of size. You’ll need to keep up with minimum payments on all your debts, but you put any extra cash towards the smallest balance first until it’s gone. Then you can put that money towards the next smallest debt and so on.

As you clear each debt, you should have even more spare cash to channel towards the next one and that’s where the snowball effect comes in. And the reward of having one less debt adds to your motivation to keep going until you’re completely debt-free.

The avalanche method is more about saving money rather than motivation. You pay as much as you can towards the debt with the highest interest first so your debt will cost you less overall. Whether the debt is big or small, by reducing the balance that comes with the highest interest, you’re getting the most benefit from your debt repayments. 
As well as chipping away at debts, windfalls can be a great way to blitz your debts for good. If you're paid a tax refund or bonus, it's oh so tempting to treat yourself. But if you do even a rough calculation of how much interest you could save by paying off your credit card instead, you can see the value in using that money to take a big leap towards getting debt-free.

Buy Now Pay Later (BNPL) can be a problem for your credit score if you ...

Did you know?

Having BNPL accounts won’t impact on your credit score. But if you miss or make late payments, your provider can report this as a negative event to credit agencies. 


The snowball approach to debt means paying off ...

Did you know?

There are a few ways to stay motivated to pay off debts. With the snowball method you put extra cash towards your smallest debt first until that balance is gone. 

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