Let’s not kid ourselves – becoming debt-free isn’t easy. It requires planning, determination, sacrifice, will-power and time. But it can be achievable and get put you on the path to a brighter financial future.
The route each person takes to debt-free will no doubt vary, but it is a good idea to have a road map. In this article, we’ll help you to make one and get on the road to being back in the black.
Ok enough of the driving analogies – let’s get started.
Assess the situation
The first step is undoubtedly to get the truth out on the table. How bad is it? There is no point in sugar-coating this or lying to yourself, we need the bare facts and you need to know – to the penny – how much debt you owe.
Gather your credit card and personal loan statements. Take a look at your overdraft balance. If you think you may have debts you have forgotten about then you can take a look at your credit report (use a free service such as Clear Score or Credit Karma) and this should include a full list of all of your debts.
Add up all of your debts and get an accurate total. Make a note of this number. Commit it to memory. This is the target.
Make a Budget
Yes, I know this tip is often regurgitated in articles about debt and I know budgeting is boring – but it really is critical if you want to become debt-free.
Make a list of 2 columns – money in and money out. Be truthful about the amount of money you spend on things like socialising, eating out, clothing, etc. Also make a note of which of your outgoings are fixed costs – that is things such as your mortgage or rent payments, utility bills, council tax, etc – things that we absolutely have to pay.
Subtract your outgoings from your income. What is left, is money that could be used to repay your debt or be put aside for savings (more on this in just a moment).
If this figure is a negative number, then you need to look at either increasing your income (via a second job or side hustle) or – more likely – reducing your outgoings. Look at the non-fixed outgoings in your money out column and realistically assess which can be reduced – more on this later in this article.
Understand your Repayments
As part of your budgeting, you should also assess how much you are currently paying to repay that debt. For example, how much are you paying in interest on credit balances? How much are you paying in overdraft fees?
Once you know how much you pay each month to service your debt, you can assess whether it may be better for you to consolidate your debts into a single amount with a loan – i.e. you take a loan out for the total value of your debts, repay all of your existing debts with this loan and then just repay the loan.
This will, of course, only really be a viable strategy for you if the interest you would pay on the loan is lower than the total interest you would pay on the combined debts – although some people also appreciate the simplification of their debts into a single amount and a single repayment.
A couple of important points here if you think a debt consolidation loan may be a good option for you:
- You need to close down the credit sources as soon as they have been repaid. Once your credit card is back in the black you should close it down. Having to repay a debt consolidation loan AND having to repay new credit card debts could be really damaging to your financial future and of course is very unlikely to get you any closer to your goal of being debt-free.
- Check the cost of repaying your credit entirely. Some lenders may charge you a fee for early repayments for instance.
- Debt consolidation may not be suitable for everyone. For example, if you have a poor credit score, you may not be able to access a loan at a competitive enough rate to make it worthwhile for you. Check out a site such as Growing Power to see what your options may be when it comes to getting a loan with a poor credit history.
Reduce your outgoings
Every pound you can cut off your outgoings is a pound that can go towards repaying your debt. You should, therefore, find every opportunity possible to reduce your outgoings. There is some great inspiration for cost-cutting in this article at the Money Advice Service, but some examples include:
- Cut down food bills by choosing a cheaper supermarket, switching to own-brand products or shopping at a time such as the evening when the chance of finding reduced to clear items is higher.
- Review your home service bills such as broadband and gas and electricity to see if there are opportunities to save by switching providers. Use price comparison sites to get a true view of the market and the savings available. This also applies to insurance products such as home or car insurance – but always ensure you are adequately covered.
You could also add to your income through selling clothes or other items you don’t need any more on eBay or Facebook marketplace, rent out a spare room, rent out a parking space, etc.
The Boost my Budget site has some additional ideas you could try. Just ensure that whatever cuts you make, they are going to be sustainable for you. Chances are it’s going to take many months to get out of debt so these need to be long term changes.
Take care of your savings
You may be tempted to just pump all available funds into repaying your debt, but if you don’t have any savings and if your budget allows, then it may be a good idea to start to build up a savings pot equating to a couple of months wages. This will mean that should you need any emergency funds in the future, you can pay them out of your savings rather than borrowing again and slipping back into debt.
Lastly, if you feel you need additional help with your debt, there are a number of UK debt charities that may be able to offer some assistance.