Dealing with debt can be overwhelming and it’s understandable if you feel lost and are unsure about what steps to take moving forward.
While it’s true that opting for certain debt solutions can play a huge role in helping you get out of debt, you can also look towards budgeting as a means to help you out of it.
In this post, I’ll look at some steps you can take in order to make some breathing space so that it’s easier for you to pay off your debts.
Identifying Your Debts. Are they a Problem?
A lot of people have at least some form of debt and in a lot of cases, it isn’t really a problem.
For example, many people with healthy finances usually have credit cards or an overdraft on their current account.
If it’s planned, debt can be quite useful. A great example of that would be mortgages for home(s). Very few people would be able to afford a home without obtaining a mortgage loan.
While debt can definitely be useful, it can also spiral out of control if not kept in check. If that happens, then debt definitely can ruin your life and lead you down a hole from where it’s very difficult to get out.
Planned Debt vs Problem Debt
If the total debts you have add up to more than what your annual income is, then you have what is called problem debt. It’s a problem because you’re definitely going to struggle to repay them if your income does not increase or if you don’t consider a debt solution of some sort.
If you have debts that you are easily able to pay off each month and they don’t total up to exceed your annual income, then you have what is called ‘planned’ or ‘managed’ debt. This type of debt isn’t a problem as long as it’s kept in check.
However, keep in mind that if your financial circumstances change for the worse, then your planned debt can quickly turn into problem debt.
This is why it’s always a good idea to pay off any debts you have as quickly as you can.
Listing Your Debts
It can definitely be difficult to own up to your deteriorating financial situation but it’s the only way to start taking steps to fix it.
You should start by listing down all of your credit card, overdraft, loan, rent and/or mortgage debt you have. Any other forms of debt repayments should also be listed.
Once you’ve listed them down, take note of how much you’re paying towards each debt every month.
Making a Budget and Reducing Spending
Making a complete plan of what your income is and what your spending habits are can be a great tool for identifying where you can cut corners.
Once you have a clear picture of where your cash is going, you can start reducing your spending so you have more money left over to pay towards your debts.
It’s important to note that sticking to your budget is as essential as making it. It will ensure you don’t spend too much and can potentially help you become debt-free.
Address Your Debts Before Saving
It’s a good idea in most cases to have a financial safety net that could help you in emergencies but when you’re drowning in debt, it makes little sense.
If you owe money on a credit card, an overdraft or a personal loan, it’s a good idea to use your savings to pay them off.
The interest rates available on the best savings accounts are usually much lower than the average interest rates on most credit cards (usually an APR of 18%).
Utilising your savings to pay off your debts can save you huge amounts of money every year due to the difference in interest rates.
Separate Your Debts and Savings
If you have debt as well as savings with the same financial institution, then they have the right to use money in your savings account to pay off the debt you have such as from a personal loan.
While it’s true that this is quite rare, it still is a possibility. If it happens, it can disrupt your finances immensely and really impact the way you had planned to spend your money.
That’s why it’s important that you move your savings to a different financial institution in order to avoid a situation like this.
Getting Financial Advice
If you have little to no experience about how to handle your finances while dealing with debt, it can be a good idea to get debt management advice from a professional.
It’s important to note that some organisations offer financial guidance whereas others offer debt management advice. These two services differ from each other.
Financial guidance refers to when a professional will provide you with all the information you need as well as details about each debt solution available to you but they will not recommend any one solution over another.
On the other hand, when it comes to debt management advice, you would be recommended a specific debt solution that would be most appropriate for your financial situation.
Please note that guidance services are not authorised and regulated by the Financial Conduct Authority (FCA).
This is why in order to get help regarding money you owe, you should look towards debt charities such as Stepchange.
Not only will meeting with a professional open you up to more information about how to tackle your debt but they might also help you set up a debt solution for yourself as well.
Making a budget and organising your finances can help get you out of debt and can also ensure you never experience it again.
This is why it’s definitely something worth investing your time in.
For more information on how to make your budget, you can contact me.