Plotting a Path to Financial Resilience

Statistics from the Australian Bureau of Statistics (ABS) reveal that from the period of 2017-2018 to 2019-2020, the average total household debt in Australia increased from $190,000 to $204,000. This signifies a rise of more than 7% within just two years. While the factors contributing to this increase would be an intriguing subject for analysis, a more urgent enquiry is how we can address this issue.

With the amalgamation of escalating debt levels, surging interest rates, and a burgeoning cost of living crisis, it’s hardly surprising that many Australian families are turning to Debt Management (DM) firms for assistance in reclaiming their financial stability.

DM firms, which are private entities, offer support through:

• Merging and streamlining various debts,
• Crafting a viable repayment strategy,
• Engaging in negotiations with creditors to both:
  • Reduce the burden on households, and
  • Meet the immediate payment demands of creditors. In certain instances, DM firms might settle your debts up to a certain limit, after which you would repay them through a unified loan scheme. The negotiation of terms and payment amounts presents a glimmer of hope, empowering you with the feeling of regaining command over your finances.

However, it’s vital to acknowledge the potential downsides to using DM services. For instance:

• Your credit rating might suffer as a result of working with a DM firm. Even though you’re keeping up with payments, the closing or reorganising of accounts might be viewed negatively on your credit report.
• Various fees are involved. DM firms operate on a for-profit basis, and their services may include initial and monthly charges based on the total debt managed. These fees add to the overall debt, exacerbating financial challenges.
• DM plans are typically rigid, necessitating a commitment to a strict payment timetable. This could prove challenging if your income is variable or if you encounter unforeseen financial difficulties.

In contemplating the advantages and disadvantages of DM services, consider these self-help strategies:

Budgeting

Formulating a budget involves three steps:

1. Document your income and outgoings, including debts, housing costs, groceries, healthcare, utilities, leisure, dining out, etc. For debts, note down the total owed, the minimum monthly payments, and the payment deadlines.
2. Divide your expenses into essentials (necessities) and non-essentials (luxuries). Then, identify potential savings – for example, reconsider the need for daily coffees. The government’s Moneysmart website provides practical tips for curbing daily expenditures.
3. Redirect any funds saved towards debt repayment, focusing initially on those with higher interest rates, such as credit card debts.

Negotiating

Most financial institutions and utility providers prefer to negotiate repayment conditions rather than deal with defaults. They might even offer support programs. The key is to communicate your circumstances early and seek a mutually beneficial agreement.

Government Assistance

The Australian government offers various financial aid packages and interest-free loans tailored to specific needs, including crisis support for unforeseen events and subsidies for living expenses. While these are subject to eligibility criteria, more information can be found on the MyGov website.

Financial Counselling

Financial counsellors are available to help decipher your financial status and guide you through challenges. Many local communities provide free or affordable financial education programs designed to enhance money management and debt reduction skills.

Given the uniqueness of everyone’s financial situation, it’s crucial to tailor your action plan to your specific needs and to feel confident in your decisions. If in doubt, consider seeking advice from a professional financial planner. Taking proactive steps towards managing your finances is empowering and lays the groundwork for financial recuperation.