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Dealing with Debt

For many of us, some form of debt is a fact of life, but in my view it’s something we should use for our advantage rather than against us.

Carrying a lot of consumer debt such as credit cards and loans acts like an anchor dragging behind us or trying to drive with the handbrake on.

Not that I am demonising all kinds of debt, far from it. How difficult would buying a house be without a mortgage or many of the functions of modern life without some kind of credit option?

My purpose here is to encourage you to pause for a moment and think about how much debt you have and how quickly you can pay it off.

Photo by Anete Lusina from Pexels

How to Save Money on Credit Cards

If you have credit cards do you pay off the full balance very month? If so great, if not you are certainly not alone. The average credit card debt in the UK is almost £2000.

Do you remember opening a credit card account? Whether online or over the phone, you were most likely given the option to make you monthly payments by direct debit. Which is a good thing, so you don’t forget the payment and incur fees plus damage to your credit score.

But here’s the thing, the credit card companies usually give you the option to pay the full balance or a minimum percentage such as 2 or 3%. This is a sneaky trick which costs you more in interest and takes years to pay off the debt. Think about it for a moment, how do the credit card companies make money? Largely by charging you and I interest on our outstanding balances right. So, it’s in their interest (excuse the pun) to keep you paying the debt for as long as possible.

I made a video which explains saving money on credit cards in more detail:

As an example, if you had £2000 outstanding on your credit card at a 20% APR, a minimum 2% payment would be equivalent to £40 a month.

If your direct debit was set up for this £40 fixed payment it would take 7 years 11 months to clear the debt and a total interest cost of £1,818.

But if you just left it alone and paid the 2% as a direct debit it would take, wait for it, 42 years to clear the debt at a total cost of £5,588!

I don’t know about you but that makes me angry and is one of the reasons I am so passionate about financial education to stop people being ripped off like this.

Find a Lower APR

Once you have ensured you are paying a fixed amount, rather than a percentage the next step is looking at the cost of interest or APR and if you can switch to a cheaper provider.

In these days of low interest rates, there is no need to be paying 20 or 30% interest on your credit cards. Use a comparison site to see if you can switch outstanding balances to a lower rate card or take advantage of a zero percent offer.

Of the money you pay every month, the vast majority goes towards the interest and very little is taken of what is called the principal, or amount you owe. So basically, you are running to stand still.

With a zero rate card, the payments are all going towards paying off the principal, which is why the debt can be cleared faster.

What about debt consolidation loans? Good question. If you have several credit cards at say 20% interest and could clear them with a loan at for example 10% that would make sense, right? Well, maybe, it depends on how long you take the loan out for. Its tempting to go for a longer term perhaps 5 years or more and thereby reduce your monthly outgoings. But remember to look at the total cost of borrowing, which should be provided.

It’s nice to reduce the amount you are paying every month, particularly if money is a bit tight at the moment. But it can be a false economy if you end up paying more in interest in the long term.

Plus if you do go down this route, once you clear your credit cards don’t be tempted to start spending on them again. Hide them in a drawer for emergencies or close one or two if you have several. Keeping your credit utilisation rate low improves your credit score. So as tempting as it might be to ceremoniously cut them up, keeping a credit card with no or low balance can be a good thing.

Having a Plan

The third way I am going to suggest you deal with debt is by creating a plan for overpaying your credit cards and loans but in a systematic way.

In my courses and live events, I teach a system called the snowball effect.

To start write down the outstanding balances on all your credit cards and loans. You may wish to use a simple spreadsheet or a pen and paper.

Then write down the interest rate and minimum monthly payment for each one.

Next rank them in order of the outstanding balance, with the lowest at the top.

Each month you commit to overpaying that amount by as much as you can. Maybe you can earn a little extra from working overtime, a second job or a side hustle business. Maybe you can also trim your expenses elsewhere.

Imagine that the minimum payment was £40 as in our earlier example and you could find an extra £50 per month and you directed the combined £90 at the first balance. All the extra payments are taken off the principal because your regular payment is covering the interest.

After a few months that debt has gone. You now have a ‘spare’ £90 per month which you use to target the next lowest balance. Now that card will be cleared in a much shorter time and you can roll the mount you were paying there onto your next debt.

It also works for loans and even your mortgage, if your provider will allow a degree of over payment.

In Summary

Lots of information here so let’s recap.

Start by getting clear about how much you owe, and the minimum payments needed for each card or loan.

Then look to switch to zero or low-rate cards if you can.

Ake sure you are paying a minimum amount as a fixed sum rather than a percentage.

Finally use the snowball effect to create a plan and stick with it. You will see the debts dissolve in record time.

It takes a little time and discipline but as Jim Rohn so eloquently said, the pain of discipline is always less than the pain of regret.

If you would like some help or coaching through this, debt management forms part of my Financial Liberation programme, which is a 6-week live online course. Details are on our website at fearlessfinance.co.

Tackling Your Finances Head On

Any time of year that you decide to tackle your finances is the best time of year. But, when New Year approaches, many people decide that will be when they make the most of the finances. 

Taking a real look at debts, income, and creating a budget.

It is important to remember not to put too much pressure on yourself. At the start of the year, people often decide to make many large changes and then can feel bad if something doesn’t go perfectly. When it comes to your finances, you can make changes, no matter how small, to significantly impact. 

Consider it like a snowball. It will start small and gather speed and size, meaning impact as you go.

Something that makes tackling your finances interesting is that it doesn’t matter how much money you have. Everyone can benefit from some actionable steps when it comes to their finance.

Tackling Your Finances Head On  - growing money image
Photo by Micheile Henderson on Unsplash

So how do you get the most out of it? And what can make your financial life more comfortable? 

Read on for some simple tips. 

Debt

It is very easy to push that to the back of your mind and begin to bury your head in the sand. Even though that is a massive source of stress and can be one of the things many people struggle with. 

Unfortunately, most of the time, that isn’t going to go anywhere, and it will need to be handled eventually. It is a good idea to note all of your debts, who they are owed to, the amount that is owed, and even looks at your original agreements.

You can find many template letters that can help you to get in touch with your creditors and freeze interest, reduced repayments, and come up with a monthly payment plan that suits what you can afford. If you don’t want to be contacted by phone, you can also request that all communications come via letter.

Depending on how much debt you have and what it relates to, you might get a debt management plan.

If you need some help, here is a useful guide that can help: Struggling With Debt?

Future planning

Is this the year that you begin to save for your forever home? One of the biggest things that they wish to purchase is a house or a new car for many people. These are new financial obligations that need to be carefully planned into your future. This means when you put your budget together, there should be a large amount allocated to these in terms of monthly repayments.

In the case of adverse credit, you might be required to speak to a specialist to see if there are alternatives to help you make your future financial dreams a reality.

Banking

Many people open a bank account, and rather than shop around for alternatives, they keep the same bank account for years. This is partly out of convenience and partly out of loyalty. 

You must remember that in the end, you don’t actually owe your bank anything, and they might not be providing you with the best possible service. It is very straightforward to swap banks in most cases. 

You can even swap your bank account online in some cases, should you need to. Use a comparison website to look at all of your bank’s different offerings compared with other banking companies. You might even find that you are paying higher charges or have a low-interest rate with your current bank.

Budget

A budget is not just something for those who are on a low income, or those looking to save money. Almost anybody can benefit from a well put together budget. A good financial budget can help you with that future planning that we just recently discussed, and it can even help reduce your debts.

One of the simplest ways is to set up your budget is to look at the money you have coming into your home and where it gets spent. 

You might find that you have more money left at the end of the month than you thought if you simply skip a few of those takeaways or reduced the number of times you use the car. 

It can be surprising just how much money you can save but putting a budget together.

Automation

You can often find that you can get a discount on utilities or services if you have an automatic payment set up. Another great thing about automatic payment is that they are usually taken on a regular date every month, making it very easy to work this into your budget. And you are much less likely to spend any money that is already allocated on automatic payment.

You can also set up automated savings. There are several phone applications, and even some banking services provide this now. 

They look at your income and outgoings, and using a special algorithm can work out how much you can save safely, and they will automatically put that into a savings pot for you.

The great thing about automatic saving is you very rarely notice it, and it can be as small as a few pence or cents at a time. Even a matter of weeks or months with the small automatic saving can give you quite a little pot of cash.

Credit card

If you are currently relying on a credit card for emergencies, then perhaps it’s time to start putting cash into an emergency fund. You can use the automatic payment system mentioned in the previous point to help you build up an emergency fund

This might mean that you will need to hold off on unnecessary spending or put all of your focus on paying off any current credit card debt. Then with your spare cash, start filling it into an emergency fund.

Finance can be scary, but once you understand all of your options regarding handling your creditors and putting yourself in the driving seat with a well thought out budget, you will have your finances ship-shape in no time at all. 

Planning For Your Retirement: Steps To Take Now To Benefit Later

If you’ve got 20, 30 or 40 years of your working life left, you might not think that you need to start planning for your retirement yet, but getting started early is hugely beneficial. If you’re looking to lay down foundations, here are some steps you can take now.

Planning For Your Retirement: Steps To Take Now To Benefit Later - growing money against the clock image
Pixabay

Investigate pensions and employee benefits

If you’re employed, you may already be paying into a pension pot, which your employer is also contributing to. If this is the case, make sure you understand the terms of the agreement and you know how much you’re putting into your pension each month. Read the terms and conditions and consider increasing your contribution if you tend to have money left over at the end of the month. If you’re self-employed, it’s important to investigate the options open to you and to find a pension that works for you. If you’ve been paying into a private pension, read the small print carefully and make sure you haven’t been mis-sold a pension. SIPP claims are increasingly commonplace. If you were advised to move your money into an SIPP (self-invested private pension), and you believe you were given inaccurate or unhelpful advice, you might be eligible to claim compensation. 

Budget

Budgeting is one of the most effective ways to take control of your finances and it will stand you in good stead for years to come. With a budget, you can set spending limits, set aside money for your savings account and plan for the future. Use your budget to compare your income with your outgoings and calculate how much disposable income you have. If you have money left after paying your bills and household costs, you could transfer cash to your savings pot or to a retirement or an emergency fund. When you draw up a budget, make sure you include every cost, and try to use accurate figures, rather than estimates. Update your budget as you go. 

Clear debt

If you’re in debt, it’s wise to try and clear it as quickly as possible. If you have credit cards, for example, you might be paying a lot of interest, which makes it more difficult to get back into the black and start saving. Check all your accounts and balances and note down all your outstanding debts. If you’re paying back a loan or a mortgage, and you’re meeting the deadlines, carry on as normal. If you’ve got additional debts, which are costing you money in interest or late payment fees, tackle these as a priority. For those worried about money and spiralling debts, it’s wise to seek expert advice. There are solutions available if you’re anxious about missing payments, you’re falling behind with your rent or mortgage, or you’re resorting to using credit cards.

If you’re in your 20s, 30s or 40s, retirement may seem like it’s a lifetime away, but time flies. It’s never too early to start planning. Taking steps to clear debt, save money and boost your pension pot now will benefit you later. 

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Financial Planning for Life’s Unexpected Events

Life always brings surprises, some of them good, some of them not so good, and many of them that require some financial input from you. That’s why it’s so important to plan, as best you can, for life’s unexpected events. By preparing now, you can ensure that those tough financial moments are a little easier to deal with when they do arrive…

Financial Planning for Life's Unexpected Events - golden piggy bank
Bildet er tatt av Thomas Jh. Baumann fra Pixabay

Insure for What You Can

These days we have insurance for everything from a broken phone to pet illnesses and even life insurance that will only pay out once we die. If you’re serious about planning for life’s unexpected events, financially at least, it’s a good idea to take out as many insurance policies for as many of the biog issues that are likely to affect you as possible. That way, when the worst happens, you won’t have to worry about the financial side of things at all.

Start an Emergency Fund

Sure, payday loans are available to many people at a push, but when those financial emergencies come around unexpectedly, it’s a never a bad idea to have a pile of money set aside to deal with them. That’s where the humble emergency fund comes in. Basically, an emergency fund is simply an amount of money that you set aside and do not touch until a serious financial emergency comes along – things like job loss, huge vet’s bills or a period of illness. Thus, emergency funds only work when you put money aside regularly and leave it untouched until it is really needed.

Stay Out of Debt

It may not always be possible, but the more you can do to stay out of debt the better Not being in debt means you will have more money available to deal with life’s emergencies and one less thing to deal with. Debt is the source of so much stress that it is worth staying out of it, or if you already have debts, looking at ways to minimise them as soon as possible. If that’s something you are struggling with, there are people who can help you.

Have a Backup Budget

Creating a backup budget, that you can fall back on when your life doesn’t go as expected is a really good idea. It will help you to immediately identify the expenses you can cut back on so that you can free up some much-needed cash and get back on financial track as soon as possible when things get tough. Make that plan now when you’re in a good place and thinking clearly, and you can spring into action right away.

Make a Will

None of us likes to think about dying, but the fact is we will all die one day and when that happens, we don’t want to leave a financial mess behind us. That’s why every adult should make a will as soon as possible. Then, if the worst does happen, those who are left behind will know exactly what is expected of them and where the money will be going.

Plan now and cope better when those unexpected life events show up! 

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Changing Your Relationship With Debt

Debt can be a terrible burden to have to live with. What can start with a small amount on an overdraft can slowly snowball into tens of thousands owed to various different companies. Pretty soon, you will be juggling a whole host of repayments to several loan companies. 

Debt can lead us to make some pretty poor decisions with our lives. It can make us desperate, and in the worst cases, can cause us to turn to crime to try to solve our problems. The cycle of debt can also cause severe problems when it comes to your relationships. The stresses and strains of harboring a large amount of financial weight can bring us to breaking point with our loved ones. If the debt is shared, not dealing well with the stress can create cracks. But if the debt is primarily on one partner, this can cause a whole different set of tensions. In many cases, people choose to hide their debts from their partners, and this will only lead to a feeling of betrayal and mistrust. 

Debt can tear families apart and put people on the streets. And, if you are in any way struggling with debt, you should take immediate action to stop it from ruining your life. This can be hard to do, and you may not know what the best course of action might be, or who to turn to for support.

Changing Your Relationship With Debt - credit cards and wallet image
Image by Steve Buissinne from Pixabay

Getting The Help That You Need With Debts

In the first instance, when it comes to dealing with personal debts such as loans, credit cards, or student loan debt, you should reach out to a friend, family member, or partner and ask them for help. To be clear, this does not mean that they should lend you money. Quite often, taking a loan from someone that you are close to can be problematic as it may lead to arguments. It is only useful if it is a meaningful amount of money that can be used to clear entire debts. Otherwise, it is often just adding to the problem. 

The type of help that you will want to get is emotional support and constructive advice. Being able to talk to someone about your money problems will be vital as it can help you feel as though you are not alone. 

If you have a partner, make sure you involve them in the situation. They have a right to know about the problems that you are facing, even if they do not directly affect them, it can still be a cause of great tension in your life, and they need to be able to support you through it. 

Seeking Support From Debt Charities

To get support, you should reach out to the citizen’s advice bureau, or a debt charity such as Step Change. Having help from people who are trained to deal with your specific problems will be greatly beneficial to you and your situation. 

They may be able to signpost you towards a robust solution so that you can start to overcome your situation. There may be ways things that you have not thought about doing that can help immensely. 

If you have a complex relationship with managing your money or the stress of your situation is weighing down on considerably, then you might need to talk to a counselor who can help you to process the problems that you are facing. 

Restructuring Your Personal Finances 

One of the primary ways that you can fight debt in your life is to change the way that you deal with your finances. You may be in the habit of ignoring the money that you have going out because it causes you stress or anxiety. This is perfectly natural, and this is a defense mechanism that you will have developed. Unfortunately, it is not terribly helpful getting you out of debt and could, in fact, cause your problems to worsen.

Getting ahead of your debts will mean understanding where your money is being spent every month. For this, you will need to create a full and thorough assessment of your income and expenditure. You should ensure that you do need to leave anything out and be fully honest with yourself about what you are spending money on. Denial will only worsen your situation. 

Start with your most essential outgoings first. This will be your mortgage or rent payments. This will be outgoing that you probably cannot do very much about, but it is important that you prioritize paying it. 

Next up, look at things such as your utility bills. Your gas, electric, water, phone, and broadband. You may be able to lower your consumption or switch suppliers for many of these things. So, shop around and make the switch to the company that offers you the best deals. Make sure that if you are on a limited offer, that you understand the terms and look at switching again if the prices start to rise. 

Your debts should obviously be on the list. You need to pay these every month so that you are not going to get further into the financial black-hole. More on how to reduce the payments on these later. 

Then you will get to your non-essential spending. This will include items such as satellite and streaming subscriptions, gym memberships, as well as memberships to clubs. There may be things that you are paying out for that you don’t even remember that you have. These are prime examples of things that you should cancel in order to save some money. 

Setting yourself budgets for your food shopping is a good way of managing your money. Have a look at home much you are spending on average each month and try to use that as a basis for planning. Think about areas of your shop that you are spending too much on. Are you buying branded items, when an own-brand product would be much cheaper? Get yourself into the habit of shopping in a more savvy manner will mean not picking up impulse buys and working off a shopping list. 

One way of managing your spending is to spend more time planning meals. If you are cooking from scratch, and also have a plan for your meals each night, you can use cost-effective techniques to get ingredients that can be used across a number of meals so that nothing gets wasted. 

Keep in the habit of documenting and tracking everything that you are spending. It may feel completely unnatural to you, but doing this will teach you to control the way that you use money, Building a new relationship with your finances takes time, and eventually using spreadsheets and checking your online banking regularly will feel natural. 

Restructuring Your Debt

One way to deal with the debt that you have currently is to take out a consolidation loan. If you have multiple debts, you will have a few different interest rates. Some of your debts may be more pressing than others, and you may constantly be juggling them. When it comes to paying them off, you will probably not get to pay them all off as there will always be one or two of your debts that keep escalating because you have too many to manage. 

Taking out a consolidation loan will mean that you can put all of your debts into one easily affordable monthly payment. This will make the overall debt much easier to manage. 

Once you have paid off all of your other debts with your consolidation loan, you should cut up your credit cards and close the accounts so that you are not tempted to go back into more debt. 

Worst Case Scenarios

If your debt has gone too far, you should get in touch with a firm that can negotiate with your lenders to agree on a settlement. Doing this may mean that you can avoid filing for bankruptcy, while also giving you the opportunity to clear your debt in a more manageable manner. 

The lender may agree to cut some of the debt for you. There will be an agreed-upon payment plan that will be easier for you to manage in your current situation.  

Nobody wants to file for bankruptcy, or have any court judgments hanging over them because they have failed to pay a debt. Getting in there early and discussing your options with a company that can renegotiate your position may be greatly beneficial to you. 

Getting out of debt may well take you a great deal of time and effort. It will need you to remain focused and change your way of thinking about money. It is possible to get out of debt, though, and although it may feel as if it is the end of the world when you are tangled up in interest and loans, it can get better. Reach out and get the support that you need, but most importantly, work at yourself in order to improve your own relationship with money and debt. 

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