Financial wellbeing plays an important role in creating stability and confidence, particularly in a changing economic environment. With a clear plan and consistent action, reducing debt can become a manageable and rewarding process rather than an overwhelming one.
Focusing on clearing short-term, high-interest debt is one of the most effective ways to strengthen your overall financial position. It not only improves monthly cash flow but also creates greater flexibility and peace of mind.
As Myles Wakefield, CEO of Wakefields Real Estate, explains:
“Once you’ve cleared your most expensive debt, you create valuable breathing space for your home loan repayments, which are typically your least expensive form of debt.”
Below is a practical, step-by-step approach to reducing short-term debt, including credit cards, store cards and personal loans.
Step One: Review your current debt
The first step is understanding exactly where you stand.
- Make a list of all your credit accounts.
- For each account, note:
- The interest rate
- Any monthly account or service fees
- The minimum required repayment
If these details are not clearly stated on your statement, contact the accounts department for clarification. You do not need to provide your account number to obtain general information.
Once complete:
- Calculate the total of all your minimum repayments.
- Create two lists:
- One ranking accounts from highest to lowest interest rate
- Another ranking accounts from highest to lowest monthly fees
This overview provides a clear foundation for informed decision-making.
Step Two: Select one account to stop using
Using your lists, identify one account that you can realistically avoid using for the next month.
If the most expensive account feels impractical at this stage, choose one you rely on less frequently. Building confidence early is important.
Your objective for the month is simple:
- Do not use the selected account
- Continue paying only the minimum required repayment
If the account involves a physical card, leave it at home to reduce temptation.
Step Three: Maintain consistency
If you reach the end of the month without using the selected account, take note of the achievement. You have demonstrated greater control over your finances.
When the next statement arrives:
- Pay the minimum amount
- Continue avoiding use of the account for another month
Over time, this consistency will result in a noticeable reduction in the outstanding balance.
If you are unable to avoid using the account, reassess your choice and select a more suitable account. Developing financial habits takes time and persistence.
Step Four: Close or reduce credit facilities
Once an account has been fully repaid, it is important to take the next step:
- Close in-store or retail accounts entirely, or
- Reduce credit card limits if you prefer to keep the facility open
Many credit facilities charge monthly fees regardless of whether they are used. Closing unnecessary accounts prevents ongoing costs and reduces the temptation to accumulate new debt.
Step Five: Apply the repayment “snowball”
After closing an account, redirect the amount previously paid toward it to the next account on your list, in addition to the minimum repayment.
This approach accelerates repayment and allows each subsequent account to be settled more quickly than the last.
Step Six: Continue until all short-term debt is cleared
By repeating this process consistently, you can eliminate short-term debt entirely. This not only improves cash flow but also places you in a stronger position to manage long-term commitments such as home loan repayments.
Clear, steady action, taken one step at a time, can make a meaningful difference to long-term financial wellbeing.
