The Debt Tipping Point
The Debt Tipping Point
The Debt Tipping Point: What are the warning signs your debt is about to spiral out of control?
Are you on the verge of the debt tipping point? Here are the warning signs of debt stress and how to avoid a debt spiral.
When Amy* got a bank loan to buy her townhouse, it came with a new credit card with an $18,000 credit limit. Amy immediately started using the card for moving expenses, renovations and new furniture. Her plan was to pay down the balance, but she found herself regularly running out of money before payday and only ever paying the minimum. Amy also had a car loan to keep up with and rent payments. Every time a new billed arrived, she literally felt sick.
Does this sound familiar? Have you also experienced debt creep? One minute your finances are ticking along and the next, you find yourself juggling bills and paying one credit card with another. For many people, the debt tipping point is triggered by a sudden or unexpected change in their finances, such as losing a job or being too sick to work. Even positive life events, such as having a baby, can lead to debt stress when one parent exits the workforce.
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The debt tipping point can also be linked to overspending or poor money management habits that snowball over time. We live in a cashless consumer culture that esteems instant gratification and where money has become increasingly abstract. Overspending can happen easily when payment methods are designed to be more and more “frictionless.”
What are the warning signs of an approaching debt spiral?
The warning signs of creeping debt stress may include all or some of these factors:
- You are unable to significantly reduce your credit card or loan balances, or every time you try, they quickly increase again.
- You regularly run out of money before payday. Consequently, you find yourself relying on your credit card to make ends meet. Paradoxically, this makes you more dependent on the sources of credit you’re trying to free yourself from.
- You often pay bills late. This, in turn, exposes you to more costs in the form of late fees and charges, which add to your cash flow problems.
- You have no savings. Should an unexpected bill or emergency arise, you have no cash reserves to fall back on which, once again, increases your reliance on credit.
- You borrow money from friends or family or you fight with people you love about money. Financial stress is a leading cause of relationship tension and breakdown. As well as effecting personal relationships, it can also impact health and work performance.
- In extreme cases, your credit cards may be maxed out, you can no longer access mainstream forms of credit and/or you’re in default. You may also find yourself relying on expensive payday loans, which put your finances under even more pressure.
How to avoid the debt tipping point
Just as there are many ways to get into debt, there are as many ways to get out of it. The key is to develop a strategy that relieves your stress quickly, ensures that your bills are paid on time and that you always have enough money to live on. For some people, the right strategy may be debt consolidation or refinancing (read our ‘Ultimate Debt Consolidation and Refinancing Guide’) or a zero-interest credit card balance transfer. For others, the best approach could be talking to their creditors about hardship arrangements while they get back on their feet.
The only way to properly assess your situation and choose the right strategy is to create a budget. A detailed, long-range budget plan will take into account all of your income and expenses over a 12-month period and allow you to test different strategies. Anything less is guesswork.
In Amy’s case, we helped her create a detailed budget that revealed that she could pay her way out of debt without needing to refinance her home. With a workable budget in place, Amy felt confident that she had the support and discipline she needed to live comfortably while she paid her bills on time and set aside savings that would break her reliance on credit cards once and for all. She paid off her credit cards in two years.
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Would you like help creating a budget? Contact MyBudget to request a free, no obligation personal budgeting consultation with one of our caring money experts. The customised budget plan we create for you is yours to keep.
*Based on a real client story – name changed.
We analyse your situation and design a plan that achieves your goals.
Until you’ve examined your finances in detail, it’s difficult to determine your exact financial position. At MyBudget, the budget plans we prepare are true long-range money management plans. The plan projects your finances over a 12-month period. So you have a clearer picture of what your future looks like, not just how your budget is week-to-week.
What will you do with your savings? Reduce your mortgage? Invest in shares? Take a holiday? Or simply enjoy the feeling of satisfaction that comes with having savings to fall back on.
Personal budgeting is the only way to truly gain control of your money and your financial future.
The benefits of personal budgeting:
- Personal budgeting is the only way to gain a thorough understanding of your financial situation.
- Personal budgeting ensures that you always live within your means, and provides a safety net for inevitable changes in life or when things go wrong.
- Personal budgeting is the key to accumulating savings and achieving your financial goals.
- Personal budgeting is one of the most effective methods for paying down debts and avoiding ongoing debt in the future.
Thousands of people come to MyBudget every year seeking our support and advice about managing their money. We can provide structure, support and guidance to help you get on track.
Get expert help from people who care.
MyBudget’s strives to find a solution for every individual. Unlike an App or spreadsheet program, our experts create a plan that’s specially designed to address your needs and priorities.
We also understand that the hardest part about budgeting is sticking to it. That’s why we do the legwork for you. We can manage your budget, pay your bills, save for you, and communicate with your creditors, if necessary.
Succeeding is easier when you have a team of experts supporting you along the way!