Facing debt hangovers

on February 03, 2022 / by Financial Mindfulness

Facing debt hangovers.

The first few weeks of the New Year is one of the best times of the year in Australia.

The weather is great, the pace of life has slowed down and most of us get to holiday and spend more time with our families.

Coming into February we are easing back into work and into reality.

One of the realities we invariably have to face is repaying debts accumulated in the preceding weeks.

Many of us started accumulating extra debts from mid-November (with Black Friday and Cyber Monday sales) through Christmas, right up to mid-January – including the expenses of sending kids back to school.

This is debt run up on our credit cards, store cards, Afterpay (or equivalent Buy Now Pay Later products) account or even sometimes from short-term loans. The piper always needs to be paid, as the old saying goes.

“The reality of holidays is over, kids go back to school. Credit card and BNPL statements have started to roll in and you could be counting the cost,” says Andrew Fleming, founder of Financial Mindfulness.

A pattern of being in debt often creates financial stress.

Is debt always bad?

“While a limited amount of debt isn’t necessarily bad,” says Lea Clothier, a behavioural money coach in her Creating a mindful Relationship with money course,” an excessive amount can often delay us from reaching our goals.”

Not all debt is created equal and by that, we mean that some debts are better than others.

“Debt used to purchase an asset that produces an income or will increase in value is better than the debt we have for things that won’t increase in value,” she says.

The latter is referred to as consumer debt and we often use it to buy household items, clothing, holidays and other expenses.

A great investment that we can actually make is paying off the interest on our debt. Repaying the debt will free up our cash flow and provide us with a return that is likely to be higher than other investments.

The problem occurs when we begin to accumulate multiple debts and ignore the red flags around those.

“Think of debt like putting on weight,” she says.

“If we gain a few extra kilos we can decide to eat less and exercise more and we can generally lose the weight without too much problem.

“But if we wait until we’ve gained 20 kilos, it’s going to take a lot more effort and a longer time to lose the weight. Comparably, if we get into trouble with our debt and spending habits, we can often get back into financial shape just by deciding to spend less and not use our card as much, or at all.

“But if we wait until we’re struggling with debt and owe a large amount, then it’s going to take us longer to repay, cost us more and we may have fewer solutions available to us to fix the situation we’re in.

It is important to note that if a debt problem is ignored, or swept under the rug, financial stress can become acute or chronic – or both.

Once we get into reality and face our debt hangover – and hopefully avert a debt crisis – we can begin to work out how to prevent debt hangovers from recurring.

We do this by planning and setting some clear goals around debts.

How do you know if debt might be a problem in your life?

If we are not actually confronted by a sheriff or debt collector, it’s easy to think we are avoiding the debt problems because they don’t feel urgent – until the crisis hits.

Meanwhile, things could be happening in the background that will have very serious consequences for you – such as a bankruptcy process beginning or a bad credit rating being earned.

Many of us aren’t aware that each time we apply for a new loan, finance at a department store or even sign up for a contract for a mobile phone, rental property, electricity or gas then it’s likely that it will be recorded on our credit report, Ms Clothier says.”

“When we borrow money, a lender looks at information about our credit experiences to decide whether to lend us money. Our bill-paying history and the number and types of accounts we have, whether we are late paying bills or making payments, how much we have in total debt are all considered.”

Here are the signs that you need to face reality with your debts:

• • If you are avoiding looking at your debts (i.e. not opening bills/reminder emails);
  • If you don’t know how much you owe;
  • If you are struggling to make ends meet;
  • If you are using debt to pay off debt (i.e. using cards to pay off other debt);
  • You regularly incur late fees;
  • If you are hiding debt levels from your partner or loved ones;
  • If the thought of debt is keeping you up at night;
  • If the thought of debt is you causing stress during waking hours and affecting your concentration;
  • If you feel like you are stuck on a treadmill of repayments and can never get ahead;
  • You regularly take on more debt with a nagging feeling you aren’t on top of the debt you already have; and
  • You are a reputation amongst family and friends of owing people money.

As you read over those red flags, it should begin to occur how much effort is expended in avoiding debt problems.

You deserve some peace from always feeling under attack from debt and repayments.

The first steps to facing the reality of your debt

It’s important not to shirk the hard work laid out here, so be prepared to get into action.

Firstly, write down everything that you owe. Get clear on the amount owing, the repayments, the interest rate, the frequency, and the number of payments left.

Use a planner to do this, marking down the amounts and dates so you can clearly see how one affects another. Make sure you understand the totals.

“Allocate your income, after living costs to debt repayments. The difference is the hole you need to attack,” says Mr Fleming. Review your budget and see how you can prioritise paying off debt, then review your spending habits too.

Do you have a budget? If not, learning how to budget is an essential step.

You should make a note right here and do some background work on budgeting and how to maintain a budget as soon as possible.

Consider what has caused the debt. Was it some kind of regular but non-essential spending?

Can you make changes to your shopping and spending habits? If the thought of this is very difficult, it might be time to work with a coach or support person to upskill yourself in your financial education and skills.

Are there things that you can cut back on, or redirect money towards the debt temporarily to help you get back on track?

Can you sell any unwanted or unused items to free up cashflow?

Can you consolidate your higher-interest debt to a lower interest alternative?

If you have a home loan you might be able to roll personal or credit card debt into it or do a balance transfer.

But be sure to cut up the credit or store cards so you’re not tempted to reuse them.

Changing your thinking around debt

Let go of any shame. We tend to carry guilt and shame with debt. But these emotions don’t help us in getting out of the situation.

No really, releasing shame is vital here. If you don’t know how to do this, it’s based on forgiving yourself and taking positive actions to build confidence.

It’s important to understand the ‘action’ part of the way out of debt problems. You took some unhelpful actions to get into debt, now you must take useful and helpful corrective actions.

Having honest conversations is one such incredibly important action.

If you’re struggling to pay – it’s really important that you speak with your creditors.

The paying bills module of the Financial Mindfulness app has some really good tips on how to manage this!

The worst thing we can do is ignore debt. Burying our heads in the sand isn’t going to make the problem go away.

There are many options if we discuss it with others to come up with a solution.

“Remember a problem shared is a problem halved,” Ms Clothier says.

Speak with your creditors, they want to support you and can help you come to an arrangement about making repayments that you can afford.

Two approaches to confronting debt

Getting your strategy right – or at least having a strategy – is usually essential to effectively confronting a problem.

Here are two ways that we can approach paying off multiple debts.

“We continue to make minimum repayments on all debts but with any surplus income we have we can focus on either a head vs. heart approach,” Ms Clothier says.

The logical approach – the ‘head’ approach – directs us to pay off the debt that has the highest interest rate first, she says.

This is the logical way to do it as this debt is costing more to repay.

The ‘heart’ approach, Ms Clothier says, prioritises the idea of making small wins first.

This says that paying off the debt with the smallest amount owing first will be the quickest for us to achieve an important accomplishment.

Paying out the smallest debt first will help us get started and once repaid it helps to free up more cash flow towards paying our other larger debts.

‘It doesn’t matter what option you chose as both options work,’ she says.

There is no one solution to dealing with debt – you will come across many different strategies and suggestions.

But the one solid gold rule with debt is this: stop ignoring it and start facing it.