The hardest thing to do when you have a serious problem is to first admit you have a problem, then to seek help to fix and overcome this problem.
In your case you may know that things aren’t right, deep down you know you have to do something about it however you keep kicking the can down the road, hoping for a miracle to come in and help fix your finances.
You keep putting off the serious chat, you try and juggle money, you miss a bill here or there, you are barely making the minimum credit card payment all the while accepting the limit increases that your bank offers. The letters and phone calls demanding repayment increase while you become more and more desperate.
You aren’t sleeping, your relationships suffer, you aren’t living the life you should be living.
ENOUGH IS ENOUGH, it’s time to fix this.
Below are all the steps to turn your financial situation around with the Ultimate Guide to Getting Out of Debt.
1. Admit that you have a serious issue and you need help
The first big step in dealing with and fixing your issue is to put your hand up and admit there is an issue. Once you’ve stopped lying to yourself and stopped making excuses, you can then start building a plan to turn your financial situation around.
So much time is wasted building or living up to a false narrative about how your situation isn’t as bad or that everything will be ok (even though you are kicking the can down the road and aren’t doing anything to fix this) or how you fake your situation around others when the quicker you take responsibility you can fix this quicker.
This also means letting your partner know about your financial situation if you have been hiding it from them.
The quicker you accept your situation and your true reality, the quicker you can assess then work on rebuilding your financial situation and repaying your debt.
Let go of your financial past
You may have been wronged, suffered from an injustice or were plain unlucky, but no matter how your financial situation deteriorated, it’s time to move on. For most, it’s time to stop playing the victim and take responsibility for where you are currently at financially and start putting plans in place to turn your financial situation around.
It’s time to stop wishing for a miracle, for someone to come in and solve all your problems. It’s up to you to get yourself out of the situation you are in and the sooner you accept this, the quicker your journey to financial reparation.
For some there may be significant trauma around your financial situation or some serious personal issues are going on behind the scenes. If this is you, please reach out to someone to chat to.
This could be a financial counselor or someone more specialized in the medical or mental health field if your problems go deeper. Don’t be scared to reach out for help, the quicker you do, the quicker you can get the right counseling or treatment and you can get back on the right path personally and financially.
By accepting your current situation and deciding to fix this, you are engaging your mind to now act towards helping find a solution rather than perpetuate the smoke and mirrors myth that your current financial situation was sustainable and repairable on its current path. rubbish that you were trying to trick everyone that was your financial situation.
Now you have a platform to build your financial success from.
2. Time to set some financial goals
Now that you’ve accepted what your financial starting point is, where do you want to end up financially? What is your definition of financial success? Is it being debt free and owning your own house with some money in the bank and some income producing investments? Financial independence? Or is it being debt free and being able to travel around the world?
The answer is going to be different for everyone and there is no wrong answer. This may also change as you travel down your financial journey. You might find that your longer term goals have changed because you have been so successful at achieving your smaller financial goals.
Now you might think it’s rather pointless to set these large far off financial goals when you are broke and in debt, however these goals will give you something to aim for. Yes these goals might be a long way off, that doesn’t mean you can’t (or won’t) achieve these. Outline your goals, put a plan in place, believe you can achieve then go out and do it.
When setting large or long term goals given the time it will usually take to achieve, it’s helpful to break these larger goals into smaller ones. For example, a large long term financial goal might be to rid yourself of all credit card and personal debt, in this example let’s use the amount of $100,000 and for the ease of calculation you’ve reached an agreement with your creditors that they will no longer charge you interest.
Now this amount may seem very daunting and you might think it will take forever to repay this amount. It doesn’t have to be this way. Let’s say you’ve gone through your finances and believe you can save over $10,000 and you are going to put this surplus towards repaying this credit card debt.
After year one your $100,000 is now at $90,000.
Next year you decide to clear your house of all unwanted items or items you don’t use and you’ve sold and given away a lot of items and raised $5,000 which you’ve put towards the debt. Including the $10,000 surplus that has gone towards the debt at the end of year two the debt is now down to $75,000.
In year three you’ve reached out to your boss as you haven’t had a pay rise in a while and your boss agrees and gives you a nice bump in pay and now you can add a further $5,000 to your repayments. At the end of year 3 your amount owed is now $60,000.
Keep this up at an annual repayment amount of $15,000 and that $60,000 is now repaid in another 4 years and you then have $15,000 to go towards building income producing assets.
Tips to set (and achieve) your financial goals:
- Think big for your long term goals and choose something that aligns with you, is going to take you out of your comfort zone and is going to be challenging to achieve.
- Set smaller goals for your journey and make sure your smaller term goals are aligned to the larger goals
- Check in on a regular (monthly) basis to make sure you are on track.
- Look to find people who have had similar success to what you are trying to achieve and look for any tips that helped them. This could include savings, budget or investment apps, investment ideas, financial education
- Mentors or accountability partners can be very helpful
- Don’t be afraid to reach out for help or coaching from a professional in your desired area (providing they are in your budget).
- Don’t be afraid to challenge and test any information that you come across (even from this website). What worked for someone doesn’t mean it will work for you so definitely test things and try things however don’t take on something blindly without giving it a once over and doing some basic research to make sure it passes your “pub test”
- Believe you can do it even though your goals will take you out of your comfort zone and what you have previously experienced.
Keep in mind when setting goals from a more impoverished financial position it can be difficult to think bigger knowing how beaten down your financial situation may have made you. It won’t always be like this and once your financial situation improves as does your knowledge and education you will find your future belief changes immensely and you find yourself pushing yourself (and succeeding) at a level you wouldn’t have thought possible.
3. Go through your expenses like a forensic auditor and put together a new budget
Aside from admitting that you have a financial problem this is probably the activity you are going to dread the most on this list. We want you to review, note down then track basically everything about your financial situation.
This means reviewing where your money went (at least the last 12 months of expenses), how much you owe (including interest rate, monthly repayments and any end dates). We also want you to estimate all assets that you have (including what you can sell to reduce debts) as well as all income that you have received over the last 12 months.
You will also want to obtain your current credit score (if you don’t already know this).
If you don’t know or have been too scared to find out, it’s time to pull the band-aid off and find out what your score is. This will also give you another guide as to how bad your financial situation is. Remember you are on a new path, one that hopefully leads to financial prosperity. Accept what happened in the past, it’s all about working toward your improved financial future.
Some countries offer free services to get a copy of your credit score.
- As with the USA, in the UK agencies such as Equifax, Experian and TransUnion offer a paid service however to access this for free you’ll likely have to engage a third party provider such as Clearscore or Credit Karma.
- In Europe it depends on whether your country has agencies that track credit scores. Visit your government website for further information.
- In Japan this is similar to Europe where there is no nationwide credit score, rather this is done on a bank to bank basis.
- In Australia you can obtain a free credit score from Experian, illion and Equifax.
Note that to get a full credit report or history in most cases you will have to pay for these (through the main players Equifax, Experian and TransUnion) and will differ in price depending on your country of residence.
Eventually you should have a detailed financial dossier of where your money went, what money you owe, what you own and how much income you earn.
Now it’s time to begin the hard work to review these and start putting together a plan.
Getting a list of your lifestyle expenses (preferably the last 12 months):
Start with going through your previous expenses (ideally this will be the last 12 months). How much of your expenses was spent on luxury items or on entertainment, expenses that could have gone towards debt repayments? Are there any patterns that you can see or any issues that need to be addressed?
A little later in this guide we will get you to go through these previous expenses and separate these into essential, non-essential and luxurious items and this will help prepare your short term lean budget.
Reviewing all your income or household income
This should not only include your personal exertion income this should also include any money earned from a 2nd job or from any cash jobs you may have performed, money from any investments such as rental income or share dividends.
Check your recent pay slip (or tax returns) to see how much you earnt in the last month or the last year and use a tax calculator to determine what your approximate net income is (if you are using your tax return this will have it listed).
Also list anyone government assistance that you may earn, this doesn’t necessarily have to be a government payment, this could also be government vouchers, etc.
As we’ve mentioned previously one of the quickest ways to turn your financial situation around and to repay debt is to boost your income. From a pay rise to a 2nd job this helps and we’ll go into more detail below about ways to boost your income.
What assets or contents do you own and what are their approximate values?
List everything, even the bonds or shares that a family member may have gifted you many years ago that you have forgotten. List all shares or investments, any retirement or pension accounts, any valuable contents (that could be sold to repay debt), basically anything that has some value that can either be sold or can earn income to go towards debt repayments. .
If your assets are linked to some of your debt, such as an investment property or margin loan with shares then assess the future potential of the underlying assets however in most cases (assuming your finances aren’t in great shape) you’d liquidate the assets and repay debt.
You may have some items that you may not realize have significant value, such as a comic book collection or sports cards that you collected as a youth. Again if looking to sell assets, assess current market conditions to determine sale suitability however unless they look to have a significant value bump in the near future they should be liquidated to repay debt levels.
If you don’t have any assets or household items to liquidate, do not worry, whilst it may take a little more longer to fix your financial situation and repay your debts, stick to the tips mentioned in this guide and start trying the income tips mentioned below to speed up your debt repayments.
Last but not least, what are your debts? And yes we mean ALL your debts!
This should include every relevant bit of information for all your debts.
Some of the information you should have regarding your debts includes:
- Who do you owe the money to?
- How much money do you owe (both individually and as a whole)?
- What is the interest rate associated with all your debts?
- What is the minimum monthly payment for each debt?
- What date is your monthly
- What date is the debt due to be fully repaid (if applicable)?
- What are the contact details of who you owe the money to?
- Is there any fee if you repay the debt earlier or repay more than the monthly repayment?
- Is the debt linked to an asset and if so is this good debt or bad debt (discussed below)?
- If so, is there any equity in the asset(s) that has a loan associated with it?
In this guide we will focus on debt that is owed in just your own name however you may have debts that are owed via a corporate entity that is linked to you. This is outside the realm of this guide and should be discussed with your accountant or qualified financial professional.
Good debt v bad debt
You may be familiar with the terms “good debt” and “bad debt”. Essentially “good debt” is debt that is tax deductible debt, used to purchase an asset where the interest payments can be tax deductible. An example would be using debt to purchase an investment property.
On the flip side, “bad debt” is debt that is used to purchase goods, items or assets that aren’t income producing and you can’t claim a tax deduction for the interest payments. An example would be using a personal loan to purchase a boat.
While “bad debt” should be extinguished sooner (this usually has the higher interest rates such as credit card debt) if there are assets linked to good debt that can be sold to reduced to eliminate your “bad debt” these assets should be seriously assessed to be sold down or sold completely and the proceeds used to reduce debt levels, particularly if your financial and debt situation is in a perilous situation.
Going forward once your financial situation is more secure there are plenty of reasons to use “good debt” to build up your investments or portfolio and we recommend you look at this later down the investment track.
Now that we’ve got all of this historical information, are there any patterns, particularly with your expenses. Are there any cash flow drains or leaks that need to be plugged? Are there any addictions within these expenses that we need to have a serious review about or to seek professional help?
If there is nothing too serious within these numbers, now we can prune these expenses and put together a lean (at least in the short term depending on how bad your finances are) budget to begin to turn your financial situation around.
Building a Lean Budget
One of the hardest things you will do is to put together a lean budget and say no to a lot of luxuries and creature comforts you enjoyed in your former life. Whilst the hard times won’t last too long these are necessary to get your finances and debts back on track.
While some might prefer to undergo a money diet, we prefer the below method to review your expenses then set a lean (at least in the short term) budget.
Firstly review your previous expenses (last 12 months ideally) and categorize or label each expense as essential, non-essential or luxury. If you are familiar with other ways to categorize expenses and you are comfortable with that way then by all means stick with that method, use what works for you however the above method is what worked for us.
Essential expenses are easy enough to identify, these would include rent/mortgage, basic food, utilities, etc.
Non-essential yet important expenses would include items such as your internet or gym membership, an expense that you can live without however it is helpful in your day to day living.
Luxurious expenses are expenses that you can live without, such as new clothes (that aren’t replacing any essential clothing) and higher ticket items such as holidays, watches jewelry, basically items that are material.
Do your best to go through your previous expenses to label them as the 3 types. As we mentioned above, there may be some holes in your expenses as unless you’ve been tracking all your expenses in the past you won’t have all the information as cash would have been used or a one off expense at a particular super market won’t have a break down as to what items were purchased nor the essential, non-essential or luxury expense breakdown
Be honest with your assessment as this will affect your potential surplus income that can be used to retire debts. The bigger your expenses, the less surplus you’ll have and the less money that can be allocated towards debt repayments (on top of your minimum monthly debt repayments).
Also be aware that while you may have the best intentions when creating a lean budget, living this budget can be a lot harder in real life. Don’t be too hard on yourself if you find yourself going over a little from what you estimated, that’s life however try and stick to a budget as lean as you can.
What we are trying to filter is all the essential (and some non-essential) expenses that will form your new lean budget in the short term. The leaner your budget the more surplus you should have and this can go towards repaying your debt quicker.
Ideally you will have access to your last 12 months of bank account and credit card statements to review your expenses. If not, do your best to estimate what portion of your expenses would have been essential, non-essential and luxury expenses.
If you have no historical expense data to go from, use a budget template (one can be found here) to estimate what your expenses will be under your new debt repayment focus.
There are other budgeting options such as the 50%, 30% and 20% option which entails that you should aim for 50% of your net income to go towards income for your lifestyle needs, 30% should go towards your lifestyle wants and 20% should be allocated towards savings.
There is nothing wrong with this above method and if you think it would work for you then go ahead and try it out. In our experience the worse your debt and financial situation the more focus needs to be on your budget and expenses (at least in the short term).
Once you’ve gotten more comfortable with your financial situation and your debt repayment program is showing signs of success, adjustments can be made to your expenses and add some non-essential expenses to your budget.
However don’t lose sight of your recent success and jeopardize this new found financial stability with unnecessary lifestyle expenses you don’t really need.
In the short term, go hard, get lean and get on top of your debts, once you’ve done this make some budget adjustments but don’t lose sight of your long term financial goals!
Now let’s review these essential and non essential expenses that will form part of your new lean budget
Let’s start with your debts.
- Reach out to companies you owe money to and look to bargain or negotiate for more favorable repayment terms
Remember the saying, if you don’t ask you don’t get. Now depending on what you owe, reach out to all debtors to see if you can achieve more favorable terms with what you owe. This could be looking to reduce the interest rate or getting an interest free period, reducing the monthly repayment amount or reducing some or all fees.
In a lot of cases you may have debtors happy to help you and offer something favorable to you however remember it works both ways and if you negotiate favorable terms and make sure you live up to your end and stick to the proposed repayment program or new proposed amounts.
Also if something financially unforeseen comes up, don’t hesitate to reach out to who you owe money to. In nearly all cases they will do what they can to help you out so be honest. Going back on your word, missing repayments and not communicating with your debtors won’t help your financial situation and will likely put you back to square one with your poor financial situation.
- Look for deals with your large regular expenses such as mortgages, education and utility amounts
When was the last time you had your mortgage, credit card or personal loan reviewed (if applicable) or put out to market? There may be cheaper, better options on the market from the last time you reviewed this.
For some this may not be a viable option due to extenuating circumstances however if your financial situation is in reasonable shape (and this is applicable to you) we recommend that you get onto reviewing these as soon as possible.
This should also be done for your utilities, your phone and internet, basically any service that has competitors with similar products you can play off each other to hopefully get a better price or offering. .
Next (if applicable) can you review any long term expenses such as mortgage, utilities (electricity/gas, phone, water, phone/internet, etc). If you have a mortgage or car loan, when was the last time this was reviewed? When was the last time you reviewed
Now there may be reasons why this isn’t possible in your situation however for most people you should be able to take these expenses to market and look for a better deal. Even if you review everything and can only achieve savings of $1,000 per annum this is better than nothing and can go towards repaying debt or investing.
Now with your essential and non essential (but important) expenses,
Of these essentials, is there a way you can get these cheaper somewhere? For example cereal might be essential however you may have previously had a high end option where a budget option may be half the price. Remember it all adds up in the end.
The above is just an example of setting a budget. There are other ways of doing this such as fixed and variable expenses or however find something that you think will work for you and try this out.
Within your essentials, ie phone, can this amount be reduced further, is there a cheaper phone plan or a cheaper energy or utility provider?
- Swapping expenses for cheaper options
Go through all subscriptions and memberships: What can you cancel and what can you downgrade. For example you might have a streaming subscription that you really can’t live without but as a compromise you can downgrade from the most expensive tier to the lowest tier.
Can your food and other regular discretionary costs be reduced by going for a cheaper brand option? Are there options such as Costco that can help reduce your monthly grocery expenses?
This could be a gym membership that had access to the weights, all classes, sauna, spa, coaching, etc. however it was making a serious dent to your expenses. There may be a low tier option that still gives you the exercise basics (such as weights access or classes only) that will be suitable for a workout yet you are saving a significant amount of money that will help your situation.
Finalize your lean and mean (short term) budget
Remember the deeper you go with your new budget, the quicker you can get yourself back on track. We’re also aware that you need to live life and going long term with a strict budget is no one’s idea of an enjoyable time. Put in the hard work early and you should be back on track to allow a few more comforts back into your budget while sticking to your long term financial goals.
At the end of every month you should have a rough estimation on what your (hopeful) surplus is and this surplus will be directed firstly to building an emergency fund, repaying debt then building up your savings and investments which we will discuss later in this guide. .
If you would like to use an app to track your budget then there are several good options available. Popular budget apps include Mint, You Need A Budget (YNAB) and PocketGuard and test each of these out (or ones that you have researched yourself) to find out what works best for you).
If after preparing a very lean budget and you still have a deficit, you will have several options, none of them pleasant. Selling of any valuable assets or household items (as well as any income boosts) should be looked at to reduce debt levels particularly if your situation is poor.
Go through any assets or household items that you no longer use, need or has value to go towards repaying debt. If this doesn’t make much of a difference to your surplus/deficit then you need to reach out to your debtors and let them know your situation.
Depending on the debtors and your relationship you may even outline the recent financial information you put together to show how dire your current situation is in the hope that they can provide some form of relief.
Most debtors will want to help you and will work towards a situation that works for both parties.
If your situation is more dire then it’s recommended you reach out to a qualified financial counselor or financial professional who can direct you to the relevant solution for your financial situation.Most countries offer government run financial counseling services.
Don’t fall for supposed debt consolidation specialists that require you to pay a large fee. Speak to a government aligned financial counselor first who is legitimate and whose services are free.
4. Picking your debt repayment strategy
By following all the steps from above, you should now have a list of all household income, a new lean budget, a list of all assets (including any assets and household items that can be sold off to repay debt) and hopefully a monthly surplus to allocate towards savings and paying down your debts. How do we do this?
There are several popular debt repayment strategies that are widely used, each has proponents and people who are attracted to one method over another.
The 2 most common debt repayment strategies include the Debt Snowball and Debt Avalanche repayment methods however there are other options (such as evenly repaying your debts or using the feel good method) that may be suitable to you and your situation.
Debt Avalanche Repayment Method
Investopedia describes the debt avalanche method as “making minimum payments on all your outstanding accounts, then using any of the remaining money earmarked for your debts to pay off the bill with the highest interest rate. Using the debt avalanche method will save you the most in interest payments.”
Debt Snowball Repayment Method
Investopedia describes the debt snowball method as “paying off the smallest debts first to get them out of the way before moving on to bigger ones—kind of a “tackle the easy jobs first” approach. You list all the outstanding amounts you owe in ascending order of size. You target the first one to pay off first, putting as much extra money into each payment you can afford. The others you pay just the minimum on. You target the next-smallest one for the extra-payment treatment when the first debt is settled.”
Debt Feel Good Repayment Method
In describing the feel good repayment method, the website My Budget states that “the Feel Good Method has you focus all of your spare cash on paying off the debt that will make you feel the best when it’s gone. When that debt is paid off, move to the next debt that will make you feel the best, and so on.”
Debt Even Out Repayment Method
In this example of debt repayment, you pay your minimum monthly repayment amounts for all your debts and you average out your monthly surplus allocated to debt repayment across all debts evenly. For example you may have a monthly surplus of $1,000 and have 3 credit cards and 1 loan (4 debts) and of this surplus all 4 debts are allocated $250.
*Debt Consolidation
This isn’t an option for a lot of people however you may be able to find a debt provider who will allow you to consolidate all your existing debts into one debt. A debt provider will usually only offer this if you have a significant income or you have an asset such as a property where you can draw down equity to pay out your other debts.
Regarding using an asset with redraw capabilities this only works if you are now very disciplined with your spending and the interest rate on the you are consolidating into is a lot lower than your other debts.
Care should be taken using this method and any loans or credit cards that are being paid off with this equity or consolidation should be closed down or cut up as you don’t want to end up in a worse financial situation because of spending habits being out of control.
For some they prefer the snowball method (particularly if the person has several loans or credit cards) as there is the achievement of paying one of the loans off and this inspires confidence of achievement pushing them to move onto the next debt or credit with vigor.
For others they are disciplined in their approach and prefer to target the higher interest debt as it will save them money in the long term. Whilst we would suggest going with the avalanche method, pick the method that is going to work the best for you and get your debt paid off quicker.
Once you’ve selected your debt repayment method and followed the other steps in this guide, your financial situation will improve and not only will your debt levels reduce, your credit score will improve, you will eventually have money in the bank and the opportunity to grow your wealth through investing.
5. Automate your finances through your own personal financial hub
Not only is automating your finances going to speed up your financial turnaround, it will also reduce a lot of stress in your life around your finances. How many times have you had a late fee or forgotten to pay a bill? This stress is reduced (for the most part) once you fully automate your finances.
There are many ways to do this however we prefer to create a personalized automated financial hub.
We’ve written about this in the past however in simple terms you select a transactional bank account (known as your financial hub account), where you run all your income and nearly all your expenses through and you’ll have a savings account (higher interest yielding) that all savings will be directed to.
When choosing your account, make sure you select one that allows direct debits and has unlimited monthly transactions. Even in this modern era there are bank accounts that don’t allow this or have a cap on how many transactions can occur each month!
After you have set up your bank account that will act as your hub, direct all income that you earn (either through personal exertion or from investments) into this account.
Once you’ve got a small buffer in this account, look to set up direct debits for all main regular expenses. This would include expenses such as rent/mortgage, phone and utilities, gym, etc
You will also have a debit or transactional card linked to this account that you could use for other bills such as groceries.
When using the card, only use it on predetermined items in your budget and where possible stick within the pre-planned amount.
**You’ll note we mentioned selecting a debit or transactional card with the above account rather than a credit card. Whilst we aren’t totally against credit cards and in the right hands that can be an excellent addition to your personal financial planning, in nearly all cases with people who are in financial strife the reason is unchecked credit card debt or personal loans.
So if you have come across this guide as someone who does have a stable financial situation and is looking for some additional pointers then yes a credit card can be useful however for most readers we suggest canceling and cutting up all credit cards and focus on using the above finance hub and initially focus on repaying debt.
The main points regarding selecting your savings account is the quality of the financial institution, the interest rate the account pays and possibly if it allows the set up of sub accounts. Reach out to your current bank or financial institution to see what they have on offer; however it’s not that important that your savings account is with the same institution as your transaction account.
Once you’ve set up your direct debits and have a linked card for the rest of your budgeted expenses your surplus will build and need to be allocated. This is then transferred to your savings account, firstly to build your emergency fund, then to be used for additional savings then investing.
One variant on selecting a transaction account can be if you have a mortgage linked to your home. In this case it’s probably better to set up an offset account to your mortgage.
For those unfamiliar with an offset account, Nerdwallet defines it as “a transaction account linked to your home loan which, like the name suggests, can be used to ‘offset’ the amount owing on your mortgage. So, if you have a mortgage of $400,000 and $50,000 in your offset account, you’re only paying interest on $350,000 – the difference between the two.”
Everything about the offset account will match the above transaction account and the offset account in this example will be your financial hub.
If the online way of tracking your money and expenses isn’t for you there are “old school” cash budgeting methods such as the cash stuffing envelope method where you set up various envelopes to cover various expenses and you allocate cash into each of these envelopes to cover those bills. Whilst this method isn’t for everyone (there is a non cash option of this method as well) there is a rise in popularity on social media for this method and a lot of people swear by it.
Whatever your preferred tracking option, find one that works for you, one that will keep you financially on track and enable you to repay your debts. Automating your finances and following a budget are just some of the important habits that will put you on the path to reaching your financial goals.
6. Build an emergency fund as soon as possible
Once you’ve automated your finances you want to protect this in the case of an unexpected emergency. This is where an emergency fund comes into play.
Nerd Wallet states that an emergency fund is “a bank account with money set aside to pay for large, unexpected expenses, such as:
- Unforeseen medical expenses.
- Home-appliance repair or replacement.
- Major car fixes.
- Unemployment.”
So the quicker you build this up, the easier you will be able to handle an unexpected expense that is thrown your way.
So how much should your emergency fund be? While there is no “right amount” you need to determine how much you feel comfortable with in your emergency fund whilst making sure you pay down debt and build up your investments. In our case we were comfortable setting an initial emergency fund goal of 3 months of basic lifestyle expenses and eventually expanded this out to 12 months of basic lifestyle expenses.
For some, they will be happy with 3 months of lifestyle expenses, for others they may want more. This will be at your discretion though 3 months is a good target to aim for.
This emergency fund should be kept in a higher yielding savings account and should only be accessible in case of emergency. You can use the savings account (as mentioned above linked to the transaction account) and set up a sub savings account labeled emergency fund or you can have a separate emergency savings account should you wish.
This allocation of surplus funds should be part of your automation where you could direct 50% of your monthly surplus towards repaying debt while the other 50% is routed to your emergency fund and once you hit your ideal emergency fund amount then your surplus to be re routed to paying down debt, building your investments or to savings.
For those who are using their offset account as their savings option can also set up a sub account with the emergency fund label should they wish (and their offset account provider allows this with their offset accounts).
Building a strong emergency fund is just another step on your financial achievement levels.
7. How can you boost your income?
As we’ve touched on, to improve a poor financial situation or one that is bogged down by significant amounts of personal debt is to increase your income. The more income you receive (and provided you don’t succumb to the lifestyle creep that increased income tends to induce) the quicker you repay debts as you can allocate this increased income to your debt payments.
So how do we do this? There are plenty of options to do this, some you can look to implement straight away, others that will take a while to boost income levels.
Ask for a payrise (or asking for more hours if paid hourly)
This is probably the simplest and easiest way to boost your income however many people either don’t think of this or are too scared to ask for a payrise. We’ve written about this topic previously however a couple of points to take into account when asking for a payrise.
- Have a plan
Wanting a pay rise is one thing, getting a pay rise is another, particular if you are a less than stellar employee. If you need to improve your worth ethic then knuckle down at work, take on more responsibility, sit down with your boss and map out what you need to be doing for a pay rise or promotion and revisit this after 6 months.
If you feel that your work has been of a high standard and you haven’t had any recent pay rises then prepare your case to the relevant person (or people) in your organization. Treat it like a special project, prepare a small summary on why you deserve a pay rise, maybe even add some customer reviews or references and note any company wins you’ve had.
- Pick your timing
If your company is reporting record profits or is in a great spot, the chances of getting a pay rise are higher than if the general economy was in a recessionary type period or your employer was losing money and laying off staff. That’s not to say you couldn’t get a pay rise just that it might be harder so pick your timing when looking for a pay rise.
- Know your worth and roughly what the market rate for your job is
Do your research to see what similar roles to yours are paying. Taking into account some of the points above (ie current economy) be realistic on what rise you could achieve but be confident with your demands and outline the reasons why.
If your employer wants a number, put forward a higher number than you would likely settle for. Your employer may give you the higher number, however it’s likely you will negotiate somewhere near your ideal amount.
- Have a back up plan
If you ask for a payrise and you don’t get it then what? In most cases you’ll likely go back to your role and what for another opportunity, however in some cases you might be seen as a
Test the market and reach out to contacts in your relevant field to have some employment options if your request doesn’t work out how you wanted to.
Look for a higher paying job
If you’ve been knocked back from a pay rise or if you know your current work climate/environment isn’t conducive to a pay rise then you may need to look elsewhere to get an income boost from your employment. Look at what’s available through employment websites and if nothing is suitable start boosting your skills or education for future job opportunities.
An underrated part of business and employment is having a strong active network of contacts. Whether to help you in your current business role or to help you get a new higher paying job elsewhere, ook to cultivate a strong network for your future employment journey.
Taking on a 2nd job
Depending on your background, skill levels or education you could go for a more simple less skilled/educated option such as driving for a car service or delivery provider or provider basic manual labor through to doing something in the same area of your current level of employment such as a teacher offering tutoring lessons or a graphic designer offering online freelancer services.
Even something small such as babysitting can help boost your income and boost your debt repayment.
Selling unwanted items
A simple way to make extra money is to sell unwanted or unused items. You may have children that have recently moved out, you may be in need of a good spring clean or you simply have some expensive household contents that when sold can pay off some of your debts.
Look to use only selling platforms such as Ebay, Craigslist or Gumtree or even something more old school such as advertising in your local newspaper or even having your own garage sale. Selling items is a rather simple option though take precautions if you are inviting strangers into your house to look at your for sale items.
Renting out items
If you’d rather keep your items rather than sell or you have a garage or shed full of tools that you can rent for income, there are plenty of options to rent your stuff to boost your income.
From renting power or garden tools on a platform such as Sparetoolz or RentMyEquipment, renting your clothes such as with Tulerie, renting your car (through Zipcar or Uber Carshare) or even renting out your unused boat through Boatsetter, there are many options that you can look into to make more income.
Be aware of any local laws around the above renting examples as well as speaking to your accountant around any particular income and tax issues on renting the assets mentioned above.
Fixing up items to sale for profit
You might have some woodwork or mechanical skills that can take a run down car purchased for a bargain price into a valuable asset to sell, if this is you, take advantage of this skill. This could be repairing broken tools or equipment, repairing quality clothes or accessories, or even restoring run down furniture.
Make sure you pay little to nothing for what you are repairing or restoring and that your improvement won’t cost much time or money.
Starting a business or side hustle
An underrated way of starting a secondary income stream is to start a side hustle or small business (usually based around a skill or your current job role). Starting small is a great way to test the waters to see if your idea is viable (without putting in too much time or money) and if successful can be scaled into a small business.
Examples include:
- Advertising to your neighbors for power cleaning driveways and walkways using your underutilized power cleaning equipment. If there’s extra demand, hire additional casual staff and rent out more equipment and build a business.
- Building a side hustle around your love of sports trading cards.
- Tutor students in academics or music to people in your area then turn this into a course you can sell online (assuming you are skilled to tutor or can play an instrument).
- Looking for potential no money down potential business purchases (though focus on quality small businesses and do your research).
- Start an affiliate marketing website.
Other unusual ways you can make extra money include donating blood or other body fluids, selling your hair or even helping people with their online dating profiles and activities.
Note, before starting any 2nd job or side hustle, check all local laws and regulations to make sure you aren’t breaking any laws and check with the right professional services (legal, accounting) to maximize your income and to protect yourself. Also check if these are available and viable in your country and town/city and also do your research and stay safe.
8. Look to improve your financial education
One of the greatest investments you could ever make is in yourself. This covers a lot of areas including improving your financial education and literacy. Even if you haven’t had the deepest education in life or spend a lot of your youth in school, there’s no reason why you can start to build your education and invest in yourself.
Part of this could revolve around self development (such as consuming books and audios from Dr Robert Anthony) while a big focus should also be put towards learning about investing and making money.
You don’t need to spend lots of money on fancy courses teaching you things like how to trade like an expert or how to learn all the real estate and property development, there is so much free content that is great and will set you on your investment path.
If you want to learn about shares or stock market investing, start with a website such as Investopedia or visit the websites of large stock enhances
Read popular investment publications such as the Wall Street Journal, The New York Times, Bloomberg, The Financial Times or CNBC.
Tune into some of the financial television channels such as CNBC or Bloomberg. That’s not to say you should be taking direct investment tips from these places, it’s more about learning the lingo, understanding the language, getting a feel for how this world works.
Once you are more confident with this, start doing your own investment research. This could be a certain stock, a certain sector or a particular managed fund. Follow this and if you are comfortable then look to put some skin in the game and invest some of your own money.
Focus on learning about one area in more detail depending on and become a relative expert. Once you’ve become successful investing in this area, start to broaden your investment education horizons so you can eventually diversify your investing into other areas.
One important part you should add to your financial and ongoing education is to learn about Artificial Intelligence (AI) and various programs such as OpenAI’s Chatbot program. Not only is AI going to be a game changer for society in general, there will be plenty of opportunities for early adopters within their current jobs and industry and also as a potential secondary income or job source.
9. Start investing
Once you have started your financial education and you are comfortable and understand the risks of investing, it’s time to begin your introduction to investing.
Always start small and start in an area you feel comfortable with. This could be in real estate, in shares, in business or some other area entirely. The more comfortable and successful you become, increase your investment amount all the while managing your risk and never invest more than you can afford to lose.
Real estate and share investing are the most popular forms of investing (and usually require the most savings to invest) however don’t sleep on the power of investing in small businesses (including online businesses). Also make sure you are building up your investment knowledge and research and look to follow finance professionals in your preferred areas.
Start with one area or sector and get good at this. Once you’ve become a seasoned investor in this field and have made some nice returns, look to diversify into other areas but keep that same disciplined approach and manage your risk.
Don’t be concerned if there is a downturn or stock market meltdown, provided your research is solid and you aren’t over capitalised then stay the course. In these cases there are usually plenty of options to add quality investments at lower prices to your portfolio.
Ideally your investments should become more passive over time with all your income eventually becoming passive income or at least income produced with very little of your time needed. Whilst most will stick to traditional income streams there are others who may go down the unusual route, however as long as you do your due diligence and assess all risks, legalities, etc if it works, stick with it.
In the beginning of your investment journey it’s likely your funds will be limited so don’t be scared to use your time and resources to build a business such as a website or online business that can eventually be sold for a significant sum of money.
If making money online or building an online business or website is something you would like to learn more about, here are 5 successful online personalities who have made significant money in the online world and have some great tips for success in this area.
10. Implement regular check ins with your automated financial hub and your investments
Going forward (at least in the first couple of months) you will want to be reviewing and monitoring your expenses in greater detail however once you automate your finances and nearly everything becomes automatic then you can take a step back.
Eventually this could involve a monthly check in with your finances and a monthly or quarterly check in with your investments. The larger your investment portfolio (particularly in the online business or website world) the more likely you’ll have to put more regular reviews in however this is up to you and how big your operation becomes.
Another tip to help with your financial progress and eventual success is to find an accountability partner who can help you stick to your goals. Let’s be honest there will be times where it will get hard (particularly when you are going through your lean budget phase) and there will be times when you will be questioning whether this is worth it.
Having a close friend or family member embarking on a similar journey to you or just to have someone to speak to will help you immensely and will keep you on track when you may be struggling for motivation.
Also look to seek out mentors in the areas that you wish to be successful in, such as investing in real estate, the share market or in the online business area. Look for successful people who have come from a similar background or financial situation that you have and have achieved something similar to what you are looking to achieve.
For those who are in a perilous financial situation due to high levels of debt, this isn’t the end of the world and your situation can be reversed. Once you’ve drawn a line in the sand to turn your financial situation around, following all the steps in this guide should put you on the path to achieving your financial goals.
To achieve anything substantial you must ask yourself what price are you willing to pay and you must also determine is the juice worth the squeeze? For a financial situation that has no debt (or at least the debt is well controlled and linked to a financially appreciating asset) we believe it is.
The journey won’t be easy and you will be significantly challenged along the way (particularly if your financial and debt situation is rather dire) however if you put in the work and look to build your income levels and financial knowledge, there is no telling how great your financial turnaround can be and how successful you can be.
Just take this first step and begin your financial turnaround today!
