Are you tired of being in debt? We’ve put together a step-by-step guide on how to get out of debt, fast!
To eliminate debt, you need a plan of action, which will include some little lifestyle adjustments. That’s why we’ve put together a list of steps you can take to rid your debt once and for all.
Identify your debt
How much debt do you need to pay off? Which lenders do you owe? What is the monthly interest rate?
Knowing exactly how much debt you’re in will help you work out if you can afford to pay it off yourself, or if you need professional help.
Gather all your credit card, loan and bank statements. Generally, if your debt repayments take up more than 20 per cent of your monthly income, you need to make some serious life changes.
Create a Budget
Budgets, they’re your ticket to becoming debt free.
They help you to figure out how much you’re making every month and where your money is going. Knowing what you spend your money on will also help you to identify areas where you can make cut backs and save money. You may be shocked by how much those morning coffees and fast takeaways add up by the end of the month.
“Beware of little expenses: a small leak will sink a great ship.”
When creating your budget, be honest. List everything you pay for: mortgage/rent, utilities, energy bills, groceries, council tax, gym membership… you get the idea. Once you’ve deducted your expenses from your monthly income, the remaining figure is what you have left over to put towards your debts.
By doing this, you will always know how much money is in your account and the total amount you need to spend. This saves you from running about like a headless chicken when an unexpected bill lands at your front door and you don’t have the money to pay for it.
Microsoft offer a Personal Budget which you can download for free. You can edit the document however you like and it will give you an accurate description of your monthly income after expenses have been deducted. You can download it here: Microsoft Free Personal Budget
Have you heard of the snowball method?
If you have multiple debts, this might be a handy tool for you. You basically list your debts from smallest to biggest, pay as much as you can to your smallest debt while contributing small amounts to your other outstanding debt. You then keep doing this until your biggest debt is paid off.
The cash you free up from your smaller debts will go towards your bigger ones, leaving you with more breathing room.
A2: I'm a big fan of the debt snowball method where you sort debts by balance. It can be empowering and help you build momentum so you're more likely to stick with the plan because you're knocking debts off. #Adulting101
— Elle (@Elle_CM) February 22, 2018
Cut up Credit/Store Cards
When in debt, having a credit or store card is not a wise idea.
Although credit cards are great for building your credit rating, their interest rates are very expensive. The average rate for a credit card is 23% APR, according to Money facts, with store cards soaring up to 30% APR.
If you’re struggling to manage these cards, get rid of them. It’s known for people to go as far as freezing or cutting up them up. It may seem a bit extreme, but it stops temptation from clouding your actions.
Switch Energy Supplier
You can save hundreds of pounds per year on your gas and electric, simply by looking for a different supplier. According to Ofgem, you can save up to £300 a year by switching. Plus, you don’t need to go through a complicated maze to switch suppliers.
All you need is your postcode and a recent energy bill, or you can answer a few ‘lifestyle’ questions if you can’t find a recent statement.
It’s best to do this before setting up any direct debits, otherwise you’ll end up having to change them.
Monitor your Spending
No matter how much debt you’re in, keeping an eye on your spending habits will give you more control over your finances. Overspending can lead to nasty consequences, so it’s important to be honest with yourself about what you’re spending your money on.
Try to cut down on the little luxuries you treat yourself with and use the money to pay off your debts. You can always reward yourself when you finally clear your debt for good.
Money Dashboard is a great app to download to budget your money effectively. It allows you to connect all existing accounts in one place to show you exactly what is happening with your money.
It’s entirely free for both iOS and Android users. The app lets you link your accounts such as current and savings account, plus it will let you see your transactions from the past 3 months. You can use the software on your laptop, desktop or more commonly on your smartphone.
Download it now on www.moneydashboard.com
Your mortgage will be your biggest financial commitment in life, so it’s important to check you’re on the best deal.
Although it can take up to 2 months to remortgage with a new lender, you can save up to £200 a month!
When it comes to finding a new mortgage deal, it would be wise to start doing your research a couple of months before. Majority of lenders allow you to lock into a new deal around 3 months in advance, meaning you will automatically switch to your new deal when your current one ends.
You can speak to a mortgage adviser who will help you find the best deal on the market. Although you may face early repayment fees if you choose to switch your mortgage before the term is up, you can be guaranteed you’ll find a better mortgage deal with a cheaper interest rate.
You can find out more on Basik Money Remortgages.
HOW MUCH DEBT IS THE UK IN?
Debt has always been a major problem in the UK. Ever since the financial crisis in 2008, debt in the UK has grown around £70 billion per year. At the end of January 2018, people in the UK owed over £1 trillion, the average debt per household estimating around £57,000.
According to the Office for Budget Responsibility, a committee who provides an analysis of the UK’s public finances, household debt is predicted to surge over £2 trillion in the first quarter of 2022.
Debt can cause disastrous problems in our lives, such as losing valuable assets like our home, generating stress and potentially affect our relationships.
It’s important to understand what causes you to get into debt, so you can avoid it altogether.
WHAT CAUSES DEBT?
Failing to Manage your Finances
Lots of people disagree with this, but budgets are so important if you want to successfully manage your money. Although they seem stressful, being in debt is far more life draining. Budgets help you to understand your spending habits, build your credit rating and stop you living from pay cheque to pay cheque.
You will always know how much money you have so you can afford any unexpected costs.
This is a major reason for racking up debt. People tend to think unemployment is only temporary, which is true, but it can cause huge financial problems in later life. This is due to the fact you don’t have an income coming in every month. Although you may be receiving benefits, it’s not merely as much as you’d earn from a full-time job, meaning you might have to go into debt to continue paying for living costs.
The best way to stay out of debt when unemployed is to budget. It helps you to keep track of your finances and keep your spending habits in check.
Normally, your expenses surpass your income. So, if you’re working part time or your income has taken a dip, there’s a good chance you will end up in debt. The smart way to avoid this is by looking for a second job, or finding other ways to boost your income, such as dog walking or babysitting.
Budgeting will also help you in these circumstances. You can look for a second job while keeping track of your finances.
One of the major reasons for separations and divorces is due to financial disputes. In the UK, it can cost hundreds to file for a divorce, depending on the difficulty of the case. Couples usually want the divorce process to happen quickly, reason being why most turn to credit to the fees.
Plus, there are no longer two incomes coming into the household. Bills and any outstanding debt will be split equally between both parties. However, if there are individual debts, you will need to pay them off on your own.
It’s common for people to end up in debt from their gambling addiction. Then, they make things worse by borrowing more money to win back what they lost, ultimately increasing their debt.
Gambling can also lower your credit rating, which can lessen your chances of obtaining a mortgage from many high street lenders.
No Emergency Fund
If you want to avoid debt, you need to be ready for any financial hiccups life throws at you. Not only will it prepare you, but will give you financial peace, knowing you can pay for those unexpected emergencies.