Understanding personal loans and debt consolidation
Conversations about the cost of living seem to be everywhere at the moment.
You can’t open a news website or listen to the radio without hearing something about the rising cost of fuel, groceries and housing.
It’s no wonder three-quarters of Australian adults are challenged by debt, everyday expenses and bills.
But unless you have a finance background, balancing the household budget can be tricky.
Perth finance brokers Yes Loans has provided helpful tips for paying off your loan early, which you can read here.
And keep reading for more budget management tips including building a budget and how to approach debt consolidation loans.
Why budget management matters
According to University of Melbourne research, nearly one-quarter (22.9%) of Australians get overwhelmed just thinking about personal finances.
The same research suggests 16.1% don’t feel they have the skills to improve their financial situation. Nearly the same number, 15.8%, say they lack time to work on balancing their budgets.
The good news is you don’t need to be an accountant (or hire one) to manage your finances.
With a bit of dedication and regular check-ins, you can monitor your money and put yourself on a path to a stable savings account.
So before jumping into personal finance solutions like debt consolidation loans, it might pay to revisit some budgeting basics.
The 60/20/20 rule of personal finance
The 60/20/20 rule is a handy guide for managing outgoing expenses:
60% of after-tax income goes to living expenses
20% is squirrelled away in savings
20% is for indulgences and incidentals
Let’s assume you earn $1,000 after tax each week.
From that $1k, $600 should go towards living expenses:
- Housing (30%)
- Utilities like electricity, gas, internet and phone (5-10%)
- Transport (5-10%)
- Insurance (5%)
- Food and groceries (5-10%)
How does your household stack up? See what Australians spend their money on, according to Finder and the ABS.
Another $200 can go directly into your savings account, bringing the running total to $800 of your $1,000 income.
The final $200 is for things that make you happy – with the caveat that splurging comes after your savings account looks healthy.
Another way to look at the 60/20/20 rule is “needs”, the 60% that goes towards living expenses, and “wants”, the 40% left over for you.
Know your costs
The first step to consolidating debts, managing loans and getting a grip on personal finances is understanding your expenses.
Most people equate cost of living with income, thinking that the amount they earn is the amount they spend.
So where is that extra 40% going?
If you are in the same position as many Australians who don’t know where their money goes each month, try mapping your budget.
Here’s how:
- Record your income
- Add your expenses together
- Categorise outgoings against the 60/20/20 rule
If you find too much is going towards living expenses, look for ways to trim your costs.
For example, you might opt to take the bus instead of driving to work, temporarily pause extra streaming services, or set a grocery budget to avoid accidental indulgences.
It isn’t easy, especially with skyrocketing fuel and electricity prices.
And unlike Bernard Salt’s comments about giving up smashed avocado toast, there is no suggestion Australians struggling to save are spending frivolously.
Instead, it’s a reminder that achieving financial freedom requires a modest time investment, diligence and dedication.
Did you know: At an average $13 per serving, you would need to skip 8,076 avocado toasts to save a 20% house deposit in Perth.
Here are some more realistic things you can try:
Set up different bank accounts
As soon as your pay comes in, funnel it to separate accounts dedicated to spending, saving and splurging.
That way, you can clearly see how much you have left to spend.
Target $2,000 in savings
Some money expertsconsider $2,000 the minimum for a healthy savings account.
If you struggle to save, set reasonable goals and work towards $2,000 in increments.
Track your expenses
Some banking apps feature smart expense trackers.
If yours doesn’t, consider setting aside a few minutes every day to record and categorise expenses.
You may find it helps you pay more attention to your daily spending habits.
Use savings to pay down debts early
Loans continue accumulating interest until paying off the entire amount seems impossible.
Once you have a comfortable savings safety net, consider using the leftover “splurge” money or additional savings to pay down loans.
Even making one big repayment every year can help pay out loans early, saving you significant amounts of interest.
Consolidate your debts
Debt consolidation loans from a finance broker like Yes Loans can help you wrangle your finances, so you don’t feel like you’re chasing your tail with interest rates and unpaid bills.
Consolidating multiple debts into one manageable loan can have several benefits:
- Simplifying debt management
- Exiting high-interest loans
- Lowering your repayments
- Pay out debts sooner
- Improve credit rating and loan accessibility
Of course, you should always do your research and choose a debt consolidation loan that works out cheaper than your current repayments.
Take control of your budget
Managing personal finances with a budget is not an innate skill.
It takes time to learn and dedication to monitoring your incomings and outgoings.
But with patience, persistence and optimism, you can take control of your finances and work towards achieving your savings goals.