At one point, only a few years ago really, as a family we had over 30k in debt. The other half has always had a spending problem. Not shopaholic type spending, but very much the notion of “I want this so i will get it”. Sometimes there would be money in the bank to cover it so it would be bought with no consideration to what bills might be coming out the next day. The worst situations were the instances when i would find yet another credit card had been taken out to buy whatever new and shiny object was flavour of the month.
Now, the other half was in no way solely responsible for our debt. When i was 18 I stupidly took credit just because it was available. Free Money right? It took a long time to clear my ‘youthful indiscretions’ and I learned the hard way about the true value of credit. We need to take credit at some point so that we can build a credit history but I would suggest that unless you have absolutely no other choice and can definitely clear the balance within a month, then do not use credit cards at all. Have one available to show that you can manage one, but only use it if necessary.
Back to the debt.
There are 2 well known ways that are really helpful to manage and clear your debt.
If your finances are in a mess like mine were, then fixing it is not easy, where do you start?
Start by listing all of your creditors. Make a note of their name, total balance and minimum payment and if at all possible include the interest rate on the account as well. Include any car or furniture finance too.
Now you need to look at your budget. Exactly how much money you have coming in each month and deduct the living essentials. Rent or mortgage for the lucky ones to be on the property ladder in this current climate, council tax, utility bills, car/house/life insurances if you have them, food, fuel/transport costs, phone, internet etc. The basics if you were living your most frugal lifestyle.
Now add any ‘luxuries’ that you truly cant live without but be reasonable. If you really don’t want to lose your bottle of wine a week then downgrade it – I drink a lovely Malbec that is only £6 a bottle! Or possibly, like us, forego Sky TV and the like and just use Netflix etc instead. It is much cheaper and you also save on the TV licensing too!
Deduct your total minimum debt payments from your remaining balance. This is now all the extra that you have to pay down you debt.
The most financially savvy way is to start with the debt that has the highest interest and throw every spare penny you have at it. When that is clear you put every penny into the next highest interest debt and so on. This is called the Debt Avalanche.
Car Loan £12000 6%
Credit Card £3000 15%
Store Card £800 12%
Loan £6000 8%
By using the Debt Avalanche you would clear the Credit Card first, then move onto the Store Card. This way you are paying less in the long run and should clear your debt quicker.
If, like me, you need a bit more motivation to keep going, then there is the Debt Snowball method. This involves clearing the smallest balance first and working your way up so that when you get to the largest one, you have a bigger ‘snowball’ to throw at it.
Store Card then Credit Card then Loan then Car Loan.
I prefer the Snowball as it clears the smallest debt quicker which gives you the lovely moment of pride when you get to cross it off your list. This boost is key to keeping motivated and feeling like you are actually getting somewhere.
You can track your debt repayments for either the Snowball or Avalanche method through various apps or spreadsheets, i like to use the unbury.me website.
No matter which method you choose is to keep making a payment that covers the interest on all of your debts so they are not getting bigger. Speak to your creditors and see if you can negotiate a lower interest rate or temporary interest freeze. This will allow your payments to make a much bigger impact.
The most important thing is to start today. Drowning in debt is scary, I know, I have been there, but hiding from it will only make it worse.
If you feel like you can’t do it alone then contact StepChange. They are experts at debt management and as a charity, there is no fee for their advice.
You are not alone, we can beat debt together.