Spring is here and after a barrage of rising costs and interest rates, now is the perfect time to spring clean your debt. If you own a business, divide your financial spring cleaning into two groups – business and personal – and do each one separately.
Here are our 3 straight-forward steps on how to spring clean your debt.
Step 1: Identify your good debts vs bad debts
When it comes to debt management, there are good debts and bad debts. Generally speaking, HEC debts and home mortgages are classified as good debts because they usually provide a return on your investment. For example, with appropriate qualifications, you may be able to earn a higher income and in Sydney, property values tend to rise more than they fall. Therefore paying off your mortgage means you are building equity.
Bad debts generally include things like credit card debt and personal loans because they have high interest rates and the items purchased usually don’t provide a return on the investment.
If you are having trouble working out your good debts from your bad ones, get in touch with us and we’ll help you through this process.
Step 2: Set clear financial goals on what you want to achieve.
Your financial goals may include things like:
- Determining which debts you would like to pay off first and setting realistic financial milestones on how long it will take you to reduce your debt levels. When it comes to bad debt, there could be advantages in consolidating your debts into one loan. If this is something you would like to consider, get in touch with us first.
- Saving for a new car or business equipment, a holiday, additional retirement savings or something special. Again, set realistic financial milestones for how much you need and how long it will take you to save for your goal.
Step 3: Create a budget that includes your debt reduction and savings goals.
To do this, start with your earnings. If you operate a business, you might want to have 2 earnings goals – a moderately sized stretch goal on what a good earnings level might be and a minimum goal if sales don’t quite go to plan.
Once you have established your earnings, it’s time to examine your expenses, your debt reduction goals and savings goals. You may find you need to make some uncomfortable decisions if your earnings are insufficient to cover everything. But if you can’t live within your income, your debt levels will continue to increase and that’s not financially sustainable.
Finance to help you thrive
Some debts can actually help you grow your business, manage your cashflow, purchase a home or investment property. At W M Wright & Co, we use our accounting expertise to help you develop your budget, structure your finances and secure the borrowings you need. Visit our website to learn more or contact us to arrange a time to talk.