10 steps to a debt-free life
Mortgage repayments, soaring utility and fuel prices and the rising cost of the weekly food shop are hitting households across the country. And it’s not just low-income families feeling the pinch. Transact, a network of more than a thousand debt and financial inclusion organisations, reported an increase in calls from middle-class households feeling the pain of price increases as far back as 2010.
"We are seeing a new type of client. Teachers, police and banking and service sector workers, many of them homeowners, are struggling with mortgages, secured loans, and credit card debts," says Heather Keats, director of one of Transact’s members, Community Money Advice.
Whether you’ve just got a couple of niggling loans or the amount you owe is keeping you awake at night, commit to ditching your debts and quit borrowing for good. Here is Moneywise's 10-step get-out-of-debt plan, to help you to turn your finances around.
1. How much do you owe?
If you want to become debt-free, the first - and arguably most important - step is to work out exactly how much you owe and how much the debt is costing you. Simply write a list with the amount owed, type of credit, lender and the rate of interest charged for each debt. This can be done by digging out all your paperwork and contacting all your creditors to get up-to-date balances.
Alternatively, you can get a copy of your credit record from one of the credit reference agencies, such as Experian, Equifax or Callcredit.
Facing up to your debts can be a daunting experience - especially if the figure is bigger than you expected - however it’s absolutely crucial if you want to become debt-free.
2. Speak up
It may sound like a cliché but, if your total debt has brought you out in a cold sweat or your repayments are starting to worry you, sharing will help. Many people feel ashamed to talk about their money worries, but the sooner you face up to it then the sooner you can start on the path to becoming debt-free.
"Debt can be incredibly stressful so it is important to tell someone," says John Fairhurst, managing director of Payplan, a free debt advice organisation. It’s not uncommon to hide debts from our partners: research from Engage Mutual found that 22% of Brits who live with their partner have a financial secret, with credit card spending topping the poll as the number one lie between couples.
If you’re committed to sorting out your problems, try to be honest with your partner. "But if you can’t share your problem with a friend or family member, speak to a debt counsellor. Above all, don’t panic," Fairhurst adds.
3. Work out your expenditure
Now that you’re psyched up for the challenge ahead and know exactly what you are up against, you need to start thinking about a personal debt repayment plan. However, in order to work out how much you can realistically afford to pay each month, you need to know exactly how much money you have coming in and going out.
This means writing a budget. Easy access to credit has made budgeting something of a lost skill, but it’s not difficult. Sit down with your bank statements from the past few months and jot down your monthly income.
Next, make a note of all your outgoings, separated into three categories: regular commitments, such as mortgage or rent payments, council tax, and loan or credit card repayments; day-to-day expenses such as food, travel, entertainment, clothes and toiletries; and finally occasional expenses, such as car repairs, holidays and birthday presents.
The second and third categories tend to fluctuate from month to month, so work out an average over a six-month period.
Accounting for ad hoc cash machine withdrawals in your statements can be tricky and this is where a spending diary can help. For the next month, commit to recording every penny you spend. You can download a free app to your mobile phone and it allows you to type in and record your spending. free apps like iXpenseIt Lite for the iPhone or Toshl Finance for Android let you enter your spending on the move. If you’re not tech-savvy, a notebook and pen will do the trick.
If, during this process, you discover that paying off unsecured debts like credit cards and loans are taking up more than 25% of your monthly income, it’s worth getting free advice from a debt charity.