Is it a good idea to borrow money to pay off debt?

Although paying off debt with more debt may sound counter-intuitive, there is a range of financial products available today designed to help minimise some of the financial pressures that come with owing large sums of money.

Years ago it wouldn’t have made any logical sense to borrow money to help with debt, because it sounds like the complete opposite of what you should be doing.

However, as financial services have broadened in the 21st century there is a range of companies and products that intend to make our financial lives a little bit easier and stress-free. There are a number of ways to borrow money to pay off your debt, although not all of them will help you in the long run. Here we cover some of the best methods of borrowing money, how they work and who they will best suit.

Personal loans

Personal loans are one of the best ways to replace your current debt with a lower-interest and more cost-effective option. Personal loans were designed to help people loosen their cash flow and feel a little less stressed and a bit more comfortable while working to eradicate their debts.

This type of loan is best suited to those who may have a few smaller loans that have high-interest rates, as these are the loans that can end up having a significant impact on cash flow. Many people choose a personal loan for consolidation reasons as it often can help minimise their monthly installments and take some of the pressure off.

This doesn’t mean that all personal loans will help your situation, they could make no difference at all or even make the situation worse. That is why it is vital that you shop around for the best personal loans for you. The key things to look out for in a personal loan are that the interest rates and any fees are lower than what you are currently paying for your loans, and also that the length of your existing loan repayment period won’t interfere with your new loan.

Sometimes it can be more costly to merge a high-interest loan that only has a few months remaining into a new lower interest loan, so make sure you carefully calculate the overall repayment before committing to a loan to ensure you won’t be paying more in total.

Credit cards

Not all credit cards will be an effective solution for paying off debt; however, a 0% balance transfer card can be an innovative and effective solution to transfer balances from high-interest loans into one lower interest, more manageable location.

Furthermore, some of the 0% balance transfer cards on the market offer an interest-free period of between 4 to 36 months that could be a great opportunity to channel more funds into paying off your debt. The interest period will typically depend based on each individual’s financial situation, but an interest-free period of any kind is better than continuing to pay high interest each month.

The option of 0% balance transfer credit cards is ideal for those whose debt is on credit cards with high rates of interest, as it allows everything to be moved over into one simple and manageable place, and the interest-free period is a bonus.

However, it is also important to remember that the 0% interest rate will only be a considerable benefit if you are able to pay off a large amount of your loan at that time. Before committing to a 0% balance transfer credit card, make sure you aren’t going to end up paying more once the interest rate kicks in after the 0% period, and investigate how much transfer fees could subtract from your savings too.

Home equity loans

Home equity often sounds like a daunting way to free up cash flow in your household, however, if you have found yourself under financial stress due to large debts, this is probably a more convenient and effective option than you think. Home equity essentially means the difference between the value of your property and the amount you have left to pay on your mortgage.

When you attain a home equity loan you will be able to access that equity amount, which, depending on how long you have left on your mortgage, can be a sizeable amount. A home equity loan works in a similar way to a personal loan, however, the bank has an added layer of security in lending you money due to their mortgage on your home. You may also be able to access a longer repayment period and the possibility of lower interest rates.

However, as with all the loans mentioned in this article, despite this loan helping to take some of the pressure off other debts the longer repayment may lead to you paying more overall. It is important to weigh up whether it is more important to lessen monthly repayments right now or to pay less in the long term. This loan is great for accessing a larger amount of money for big purchases or paying off a large debt, and it is best suited to situations where the priority is feeling less pressed for immediate cash.

The verdict

The borrowing options mentioned in this article are all effective ways of improving your financial situation in the short term.

Personal loans and credit cards are usually best suited to multiple smaller debts, whereas home equity is better suited to situations when borrowing a large amount is necessary. Before going ahead with your chosen method of borrowing, always consider the long term impact and that you are lessening your total debt as much as possible.


What is zero based budgeting and how to use it

Zero-based budgeting, sometimes abbreviated to ZBB, is a specific method of budgeting that pre-emptively strategizes where each penny of your paycheck will go before it enters your account. It is an exceptionally simple method of budgeting and is often proven to be an incredibly effective way to ensure that all of your finances are put to good use.

Zero-based budgeting was once a popular method of business budgeting in the 1970s, but it is now seeing a revival in the realm of personal finances. In zero-based budgeting, each penny is given a purpose, so that after dividing up your finances you are left with zero remaining. Every expense is justified, leaving less room to spend money that should really be used for another purpose. In order to divide your money up effectively, an accurate budget will need to be created to serve the upcoming period.

The basics

The key to successful zero-based budgeting is the strategy made before any money even enters your account. Your budgeting strategy is devised by gathering money into groups to serve different purposes, based on your regular outgoing and saving goals.

Usually, the most successful zero-based budgeting plans can take months and years to perfect, as it involves a detailed and thorough analysis of previous strategies and their results, what worked and what didn’t, in order to shape the next months of budgeting. However, just because it can be a lengthy process to perfect doesn’t mean that you won’t feel the benefits within your first month.

Problems with traditional budgeting

There are many different budgeting programs and apps designed to help you feel more freedom with your finances, however, for some reason, it is still too easy to go over budget.

There are a range of problems that arise from traditional budgeting, that can be solved and dealt with better with zero-based budgeting.

For instance, traditional budgeting programs have a lack of flexibility. Any financial situation that does not rely on a steady paycheck will struggle to fit into the standard structures of traditional budgeting. The lack of room for flexibility can often be one of the main reasons people struggle to stay within budget.

The benefits of zero-based budgeting

Stop living paycheck to paycheck

Living paycheck to paycheck can be an especially hard financial cycle to break free from, and it causes stress and worry due to the fact that you depend on future paychecks for your bills and unexpected expenses.

If there was to be a sudden change in income, you are left with little security that you will be able to continue paying your bills and living comfortably.

With zero-based budgeting, you start with zero, and look back for your finances instead of depending on the money that you don’t have yet. Bills are paid using the money from last month’s income, so you can reduce the stress in covering for them.

Of course, this kind of security is not instant, but with each month of zero-based budgeting and setting money aside, you will feel more financially free and secure.

Know exactly what you’re spending

Before setting up a zero-based budget, it is usually recommended that you go through all of your expenses for recent months to get a thorough idea of your spending, you may be surprised about where most of your money goes.

For example, you may be spending way more on food than you thought you were budgeting for. This allows you to set up your zero-based budgeting strategy accordingly and realistically, while also encouraging you to consciously cut back in certain areas.

Evolve your relationship with money

One of the biggest advantages people report from their experience with zero-based budgeting is a renewed relationship with money. It allows you to feel more secure with the amount of money you have and stress less. For many people, it is a useful tool for beginning to see a bigger financial picture, approaching their savings accounts and debts with a new focus.

How to begin zero-based budgeting?

With just a few steps, some intricate strategizing and planning, you can begin zero-based budgeting and quickly feel your finances free up. This is intended as a rough intro – for a more detailed description of setting up a zero-based budget, see here.

Track your outgoings

This is always the first step for zero-based budgeting, and depending on how much time you have and how accurate you want your budget to be, it may take a couple of months.

This step is key in understanding how much money you spend, what it is spent on, and where you can cut down. Go through your bank statements to find an accurate record of your transactions, every bill you paid, savings you made, food costs and more. The longer you spend keeping track of your outgoings will allow you a more solid start to zero-based budgeting.

Categorise expenses

Once you are fully aware of where all your money is going, you can start shaping individual budgets for each area of your spending.

Know exactly how much money you need to set aside for paying utilities each month, rent, food, car payments, etc, which should then leave you with a certain amount left over.

With traditional budgeting, this leftover amount would be used on impulse purchases and luxuries, however, the aim of zero-based budgeting is to leave yourself with zero, so planning to utilise the remaining spending money on paying off debt, taxes and savings, and a certain amount for a new outfit or restaurant meals.

If you end up with less income one month, zero-based budgeting makes it easier for you to make cuts on the categories that are less essential, for example, maybe fewer restaurant meals that month.

Ultimately, zero-based budgeting is not a quick fix for financial security because there is no quick fix. However, it makes the process much more simple, methodical and easy to stick to, allowing you to feel much more at ease with your personal finances within just a few months of planning. Make tweaks to your budget and find what works for you, it will be incredibly worthwhile in the long run.