We explored the reasons that make it hard to take that first step towards financial freedom, and we found out that science might just have the answer – inertia. The Institute of Inertia, a collaboration between university academics in the UK and Compare the Market, set out to conduct research with everyday consumers to explore reasons why it can be difficult for people to dig themselves out of debt. Even when you know it’s the right thing to do, it’s hard to take your first steps.
This research uncovered four different categories of inertia that most of us fall into and which have a direct effect on how we tackle our financial lives. Researchers believe understanding which category you belong to and your behaviour is key to developing tools and techniques to break your habit of putting things off.
Knowledge is power and being in control and understanding your behaviour. From here, you’re ready to take the first step to take back control of your finances, especially when it comes to debt.
Understand Your Debt Personality Type
First, what is your debt personality type? According to the Institute of Inertia, these personality types can help you understand your own behaviour. Digging your way out of debt isn’t always easy, but insights help you along the way.
If you’re still not sure, you can also take a short quiz to find out exactly which category you fall into. Do you identify with any of the debt personality types below? If so, you’re far from alone.
- Head in the clouds: If you fall into this category, chances are your inertia around dealing with debt comes from there just being too many other things to think about in your life, be that your family, your job, or your social life! People with their head in the clouds often miss crucial debt and bill payments, meaning debt builds up unnecessarily.
- Head in the sand: Having your head in the sand means while you know you need to tackle your finances, you tend to avoid it because you think it might be too difficult. For example, you probably understand consolidating your debt is the right thing to do but working out what that first step is has put you off from taking the first step.
- Heart over head: People that let their heart rule their head means they can be overly swayed by the emotional element of money. If your heart rules your head, chances are it can be hard to stick to your budget when the weekend rolls around and your social life kicks in. Heart over head people are probably familiar with the feeling of regret which kicks in after a big night out on the town, an impulse shopping spree or an expensive, spur of the moment holiday.
- Head in the game: Lastly, this debt personality type is where we want to be. People with their heads in the game have developed habits that help them deal with their debt, become debt free and then stay on top of their money management.
Now that you understand the behaviours behind debt, you can start to make real changes. If you fall into any of these categories above, there is always time to change your financial habits. Below, you’ll find the first steps to take to dig yourself out of debt.
Step 1. Know How Much You Owe
Before you do anything else, you need to understand just how much debt you have. This means making a list of your debts, creditors, monthly payments, and so on. This is a great opportunity to check your credit rating to make sure you have a clear view of your debt picture.
Once you know how much you owe, you’re ready to create a budget. Periodically checking in with your debt to make sure you’re on track with your goals is an important financial habit to set for yourself. You can also use money management apps to keep yourself in check.
Step 2. Decide What Debt to Pay First
Next, it’s time to make a clear decision. If you’re someone who feels paralysed not knowing what to do next, making this decision can be very freeing. If you have multiple types of debt (credit card, personal loans, etc.), it’s time to create a clear action plan about what debt to pay first.
You can prioritise your debt based on interest rates, lowest balance, or whatever makes sense to you. Learning the difference between the debt avalanche vs. debt snowball method can help you determine what works best for your debt personality type. What works for one person might not be the right fit for your debt personality, so it’s good to be flexible and open-minded.
Step 3. Build an Emergency Fund
Lastly, another first step should be to build an emergency fund. An emergency fund is money you set aside for unexpected expenses, like car repairs, job loss, etc. If you don’t have an emergency fund, you could end up paying for these expenses by taking on more debt. This keeps the debt cycle alive and well.
Instead, work towards creating a small emergency fund. Even if you only put aside a small amount each month, every little bit helps. Knowing you don’t have to rely on credit cards or loans in case of emergency is worth the peace of mind.
Recognise When You Need Debt Help
No matter where you’re at today, you can create a better financial future for tomorrow. Once we identify what it is about our behaviour that’s been holding us back, we’re ready to change the narrative. Digging yourself out of debt might take time, but it’s easier than you think.
Developing these habits starts with acknowledging and working on our behaviour around debt. When you’re ready to take the first step towards a debt-free future and get your head in the game, we’re here to help! Get in contact with a member of our friendly team on 1300 368 322 to discuss the best solution to help you move forward.