Debt is a mess that only you can clean up. It’s a common problem that doesn’t require financial wizardry, expensive advice or an appearance on the BBC’s Your Money or Your Life, just common sense and self-control.
The charity Consumer Credit Counselling Service says that a simple rule of thumb is to add up all your monthly credit commitments, excluding mortgage payments. If this totals more than 20% of your net monthly income, you are over-extended and need to cut back.
Before managing your debt, you must know exactly how much you owe. So, work it out. Being dishonest with yourself will only lead to further problems in the future. Ignoring the subject will not make it go away. If at any time you think you will be unable to pay a debt, contact your creditors immediately to discuss the matter. Always go through your bank statements and other relevant correspondence carefully.
First, prioritise your debts. Mortgage/rent payments are most important because they can lead to loss of your home if they are not kept up to date. Switching your mortgage – which is likely to be your single biggest monthly expense – is an option to consider. An independent financial adviser or a broker can advise you about your re-mortgaging options and whether a switch could save money.
Utility bills are vital, too. You won’t be able to lead a normal, comfortable life if your water and electricity have been cut off. Switching to energy suppliers that offer more competitive rates can save hundreds of pounds every year. Paying by direct debit helps to avoid the worry of sending cheques on time, and some utility providers offer discounts to customers who pay using direct debit.
Saving money and budgeting may seem like obvious steps to take, but they can only be effective if done in a regimented and efficient manner. Work out how much of your debts you can afford to repay each month and how much you need to live. Put some money aside – even a small amount – for unexpected bills and other expenses. Withdraw a set, affordable amount of money from the bank at the beginning of each week, and give your ATM and debit cards to a friend or family for safekeeping.
Look for a bank that offers the best rates on your overdraft. High street banks often don’t always offer the best deals, which can be got from one of numerous internet banks.
Britons have become a nation of spenders, not savers. One in four families is now more than £1,000 in debt, according to a report by the Institute of Fiscal Studies. Savings, meanwhile, are at an all time low. But saving does matter, and you should be doing it. Historically low interest rates have helped to cut the savings habit as good returns on your cash have been difficult to find. But everyone needs an emergency savings fund to cope with the unexpected. Life is full of weddings, holiday plans, or simply rainy day spending. It is much more sensible and less stressful to save regularly than have to borrow money to fund the unexpected. And of course it’s cheaper.
You need to identify priorities. Experts say you should aim to have a minimum of three months' net salary put aside for emergencies, such as losing your job. If you can't afford this much, then save as much as you can afford. There are plenty of accounts that allow you to save a small amount each month. You’ll be surprised how quickly the money will grow to something substantial.