See how quickly you could become debt-free and compare the snowball and avalanche methods.
See how quickly you could become debt-free by paying off your smallest debts first.
The debt snowball method puts your debts in order from smallest balance to largest. You continue making the minimum payment on every debt while putting your extra repayment money towards the smallest debt.
Once that debt is paid off, its minimum payment is added to the amount you're paying towards the next debt. This creates a "snowball" that gets larger as you pay off each debt.
Living within your means simply means spending less than you earn. It sounds straightforward, but with rising housing costs, groceries, bills and lifestyle expenses, it can be surprisingly difficult to achieve.
The good news is that living within your means doesn't require giving up everything you enjoy. It is about making deliberate choices with your money so that your spending fits comfortably within your income.
The first step is to work out your true take-home pay. Your annual salary isn't the amount that lands in your bank account after income tax, Medicare and other deductions.
You can calculate your take-home pay using our Australian Take-Home Pay Calculator.
Once you know your actual weekly or monthly income, go through your bank statements to list and categorise your regular expenses and build a household budget.
Here are five key ways to reduce how much you spend and keep your expenditure below your take-home pay:
If you have debts (not counting your mortgage or HECS/HELP), it is important to reduce these first as you are paying high interest on the debts, which means you are paying much more than the original purchase price.
Try our Debt Snowball Calculator to see how long it will take you to pay off your debts using the snowball method.
Think about cutting up your credit cards if this is a spending trap for you. Keep one card for emergencies only.
If you are prone to impulse buys, have an expensive hobby, or a full-blown shopping addiction, it helps to call it out for what it is, and identify it as a problem if it is stopping you from living within your means.
Recognise that the impulse to buy is an emotional craving that has not been satisfied by past purchases and won't be satisfied by future purchases. Once that money is spent, it's gone, and you have a very expensive, now second-hand item taking up space in your house.
Look for satisfaction instead in channelling your limited resources into paying off debt, building savings and investments, and investing in things that appreciate in value.
Set aside a strictly limited budget for spending on personal luxuries or pastimes and use it to reward yourself when you've achieved other financial goals.
Cars can be a huge, upfront expense, or an even more expensive personal loan with a high interest rate. Resist the urge to keep up with the Jones' and settle for a good, reliable, used car instead of the shiny, new model straight out of the showroom.
Think also about the cost of fuel, maintenance and repairs.
For most people, your house is the single biggest expense in your household budget, whether you rent or pay a mortgage. And the cost of housing is rising faster than salaries in most places.
If you are struggling to live within your means, it is worth seriously considering downsizing your housing, by either moving to a smaller home, or moving further away from the big population centres where housing is more affordable and you can get the same size house for less money. It might seem a hard decision at first, but it will pay dividends in the long term in real dollar terms as well as peace of mind.
Another option if moving is not a realistic option is to take in a flatmate or lodger to help share the costs.
Finally, another way to bring your expenditure below your take-home pay is to increase the amount of take-home pay you get.
Consider asking for a raise at work, actively applying for other jobs, including in your current workplace, or starting a side hustle. There are many options for side hustles that don't require big start up costs.
If possible, automate your savings on payday rather than waiting to see what is left at the end of the month.
Even a relatively small amount can build an emergency fund over time. Once you have a financial buffer, you can start putting additional money towards goals such as a home deposit, mortgage repayments, investments or retirement.