Transform your finances with these debt payment and savings methods

February is the perfect time to take control of your finances. While we may start the year off with good intentions, it doesn't take long for things to get out of control.

Things get busy, and we don't always have time to think carefully about how we are spending and saving.

Thankfully there are some incredible strategies you can use to get on top of it all, tried and tested by those who have gone before us.

So, first things first...

Step One: Create a budget

You need to sit down and do a budget or check your existing budget. Note down exactly what you are earning and exactly what your expenses are.

If you have an irregular income you can average out expected earnings and round it down a touch to keep it safe.

Then, contact each and every company from your telco to your electricity company and negotiate for better deals. It's a good idea to do this once a year or every time your circumstances change.

Step Two: Pay off your debt

Here we are discussing consumer debt, not loans for appreciating assets such as property. Consumer debt and buy-now-pay-later schemes have a habit of creeping up on us. Before you know it you are paying higher interest rates and late fees.

To nip it in the bud for good, figure out exactly what you owe and who you owe it to. Then, choose the best way to pay it off that suits your pay cycle and personality.

Two popular debt payment techniques are:

1. 'Snowball' method

The 'Snowball' method means paying off your smallest debts first. It brings with it the satisfaction of paying off some of your debts faster, which can prove motivating.

Figure out which is your smallest debt and focus on paying off as much as you can as fast as you can, while paying the minimum on others.

Once the smallest debt is paid, move on to the next smallest, continue until you get to your largest debt which will be your final one to pay off.

2. 'Avalanche' method

With the 'Avalanche' method you make minimum payments on all your debts and focus as much of your money as possible paying off the most expensive debt first — that is, the debt that has the highest interest rate.

While this can take longer to pay off your first debt, it will save you hundreds in the long run.

Both debt payment methods were coined by personal finance expert Dave Ramsey and you can find out more about them here. Once paid off, close the accounts in full to avoid the temptation of using them again.

Step Three: Start saving

The best way to save money also comes down to your pay cycle and personality but there is a method for everyone.

Popular strategies include:

1. $5 envelope

This is a fun way to save but may prove challenging as less and less of us use actual cash these days. But if you do, pledge that for the next year you won't use your $5 notes.

Instead, all $5 notes go into a shoe box or secure container at home until the end of the year when you can add it all up and decide what to do with it. You may use it for Christmas, holidays, or paying down remaining debt.

The method has been doing the rounds on Facebook with many Aussies choosing to repeat it year after year.

2. Rounding up apps

There are a few rounding up apps, some that come with investment options and some that don't and they are pretty nifty.

You simply download the app and attach it to the account you use most often. Each time you make a purchase the app rounds up the amount to the nearest dollar and transfers it to the app. That money can then be invested.

If you set and forget you may find yourself with substantial savings by the end of the year.

Popular round up apps include Acorns, Chime, Digit and Qoins.

Come December you'll be in a much better financial position than at the beginning of the year. While you may not be debt free, you can safely say you are well on your way, and having some savings will make it much easier to sleep at night, particularly during the holiday season.

Nothing tests your newly-learned money management methods than Christmas but stay strong.

You can't buy love, but you can buy better financial security.

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.