How to budget to get debt free
StepChange helps people recognise the danger signs of debt and get help. But you don't have to have a debt problem or need debt advice to want to assert a little bit more control over your spending.
Many people make a vow in the New Year to get their finances back on track: but debt can be tackled at any time of the year. Make this the year you actually do it.
Whatever your financial goal, you can achieve it with these top tips.
A budget is the key
The first step to tackling any sort of financial issue is to put together a budget. It might sound obvious but it's true.
Budgeting can be tricky but get it right and you'll take a huge step towards controlling your spending forever.
The key to building a brilliant budget is to be accurate.
Look at your bank statement and highlight every regular payment. That way you can clearly see areas where you can cut back. Every small saving is money you can put towards your debt or save for the future.
Fudge the budget and you're only cheating yourself.
List every bill and every area of spending right down to the newspaper or coffee you buy every morning (you'll be surprised how quickly they add up).
Even the act of writing it down helps: psychologists have found that writing is very powerful in forcing people to take action.
If you're unsure where to start there are lots of really good tools and apps out there that you can use for free.
The Money Advice Service (MAS) budget planner, available here, is a great place to start. It's an easy to use tool which can show you how much money you have left at the end of the month.
The StepChange Debt Remedy, available here, goes a step further by providing a budget and a personal action plan to deal with your debts.
Is debt consolidation the answer?
Probably because they are constantly advertised on TV, when people look at sorting debts they often think of consolidation loans.
Consolidation loans can work as a solution but in our experience they often backfire. Because of the interest, a debt consolidation loan could make your debt bigger, and take you much longer to pay off.
The first thing to work out is if you can afford the monthly payment of the consolidation loan without having to fall back on to credit.
The common mistake people make is to clear their credit cards with a loan but start using them again. They then have the loan and the new debt payments to make. This all comes down to not budgeting.
There are plenty of debt consolidation calculators out there to help you, even we have one, but be aware that they can be misleading and just try to convince you to consolidate, even if it's not necessarily the best option.
Cut up the cards and pay off the highest interest first
This may seem drastic but cutting up your cards can be cathartic and be the jolt you need to stop spending on the plastic.
Once you've put together your accurate budget (see above) have a look at which card has the highest interest rate and start making overpayments to that account first.
You need to look carefully to understand if some of your cards are on 0% deals and to work out when the deal ends and what the interest rate is after that time.
You might find, if you're near the end of a deal, that you could be better overpaying a 0% card, to avoid being penalised when the deal ends.
If your credit rating is still good enough to qualify for a 0% balance transfer deal these can be a useful way of reducing your debt quickly and with lower fees.
Avoid the temptation to spend on the old card you've transferred away from.
That's a very slippery slope. Cut it up and close it.
Offer a full and final settlement
If you're able to offer a lump sum your creditors may settle a debt for less than the full amount. Remember they don't have to so don't rely on this as a way out of a debt.
Full and final settlements are usually an option if you come into some funds and want to make a one-off payment to get rid of the debt.
Sometimes when you have a debt problem a creditor will write to you offering you a reduced deal. This is in the hope that you'll ask around for money to clear what's outstanding.
The important thing to remember with full and final settlement is that you must get the offer in writing from the creditor.
Once you have the offer in writing you must keep that letter safe.
It's not unusual for creditors to attempt to chase the rest of the debt at a later date.
If you're really struggling
At StepChange, we believe everyone should be able to live debt free but if you're struggling to reach that goal don't be unrealistic, there's no shame in asking for help.
The earlier you get debt advice the easier it is to find a solution.
We know 41% of our clients waited a year before getting help. Often they tell us they wished they'd done it much sooner.
If you're worried we have a StepChange Debt Danger Signs test on our site that you can use to see if you need debt advice.