Become Debt Free

Most people who have debts would admit (if pressed) that they would love to become debt free. The key to becoming (and staying) debt free is to have a budget. I know this sounds obvious and boring but it cannot be stressed enough that it is the bedrock of sorting out your debt problem and making sure that it does not return.

Make time to write down all of your regular monthly outgoings. Your bank statement is a good place to get this information. Most people’s monthly budget would include the following items:

Rent/Mortgage
Utility Bills (gas, electric, water)
Tax bills (e.g. council tax in the UK)
Insurance
Telephone
Pension contributions

Mobile phones
Internet
TV Subscriptions

Car loans
Personal loans
Credit card payments

Next add an allowance for food/clothing (if you’re not sure how much this is then keep a diary for a month and total up how much you spend).

If you need to, then make an allowance for luxuries such as eating out/leisure activities/holidays.

Now total up your income, not forgetting to include your partners income (if appropriate) and any benefits that you might receive on a regular basis.

Your path to becoming debt free depends on the relative size of your total outgoings and total income.

If your total income is more than the total of all your outgoings (including allowances for all luxuries etc.) then you don’t really have a debt problem. Simply allocate all of the surpless each month to paying off your debts and in time your debts will be gone.

If your total income is more than all of your total outgoings except the luxury items then you are going to have to make some lifestyle changes to pay off your debt/stop accumulating any more. Cut down on eating out/go to cheaper restaurants. Go on fewer/cheaper holidays. Look at the amount that you spend on things like mobile phones and TV subscriptions. Checkout a money saving site (such as MoneySavingExpert) to see if you can reduce the cost of utility bills/insurance credit card payments etc. Investigate whether you can pay off any car loans by selling the car and driving a cheaper one (be careful if trying to do this since the car is actually the property of the loan company until the loan is paid off). Use the surplus that you generate to pay off your debts. Also if you have any savings then use these to pay off debt as you will almost always save more in interest paid than you could earn by investing.

If your total income is more than all of your regular outgoings but less than the amount that you need for all the regular payments that you need to on your debt (loans, credit cards, car loans) then you have a potential debt problem. Take the steps described above to try and get your monthly budget to balance. If you can then you will just have to carry on paying off your debt until it becomes more manageable. If not then you should stop accumulating any more credit (unless your problem is going to be very short-lived, e.g. 6 months or less) and consider a debt solution. More on the different types of debt solution available in another post.

If your total income is less than your essential outgoings then you have a bigger problem. You will need to work at reducing the size of your outgoings (by all the steps described above) and if this doesn’t reduce them by enough then you will have to consider moving to a smaller house/refinancing your mortgage to reduce monthly rent/mortgage payments. No debt solution will help you to cope with your situation if you cannot meet your regular essential monthly requirements.

The last option that I will mention, that applies to all of the above cases is to try and increase your income by taking on different or additional work or investigating whether you are entitled to any benefits or tax credits. I mention this last because it is often something that people use to postpone doing something about their debt problems. They will say “I’m getting a pay rise soon” or “I’ll take on a part-time job when I’,m a bit less busy” or most dangerous of all “the business that I am starting will save me”. It will take me another post to explain why these options are usually no help.

For all of the above if you feel you need help then there will be an agency that can assist you. In the UK try the Citizens Advice Bureau.

Tags: Debt Advice, debt assistance, Debt Problems, Debt Solutions