Get yourself out of debt – Simple guide to financial independence

It seems it has never been easier to get yourself into debt. Debt is however a vicious circle for many, particularly when having children. This post aims to look at the basics of financial management to help those in-debt find a way to get out of it, or at least to minimise the impact of their debt.

First and foremost, don’t panic; don’t bury your head in the sand either though! The mere fact that you are looking at this post shows that you are looking to get control of your financial situation, and that means you have motivation and discipline, you need to focus these to improve your financial situation.

Here’s a simple guide to improving your situation.

Read around and document the key steps – There’s loads of financial advice out there. Don’t read this guide alone. Read several others, and make sure you actually document the key steps you feel will help improve your situation most. This is YOUR financial plan to independence. Place it on your fridge, noticeboard or wall to make sure you are regularly reminded of your plan and focuses.

Document what you spend – Document everything. You HAVE to understand your incomings and outgoings if you are to have any chance of getting control of your debt. Some people choose to manage budgets within a spreadsheet, though I suspect many will find this tedious and soon give it up. Either way, you need to find a way of working out what you spend today. Look back over the last month at minimum and document everything you spent money on, grouping these into key areas e.g. “Grocery Shopping”, “Clothes”, “Nights out”. This includes everything… shopping, drinks in a coffee shop, a Mars bar in the office, charity donations, takeaways, mortgages etc…

Be realistic – don’t pretend to yourself that you only spend £10 a week on coffee’s if it’s really £20. This whole exercise is a waste of time if you don’t apply real figures.

Allow for unusual/infrequent expenses – Don’t forget replacement of tyres for the car, any house repair work, or charity giving that you like to do when friends want to be sponsored. For infrequent expenses, apply an appropriate proportion to your outgoings list (i.e. if you need new 2 new tyres every 2 years, apply 1/12 of a tyre cost per month.

Document interest rates – For expenses where an interest rate applies, like a mortgage, or credit card debt, document the interest rate alongside the expense so you can see a clear picture of the rates available to you, and whether debt is in the best place available to you.

Document what you earn – Ensure you document your NET pay, i.e. after tax. You need to be thinking about the amount of cash that hits your bank balance in a month.

Compare the two lists you have created – what you earn vs what you spend – Hopefully you are earning more than you are spending. If not, you now have a clear picture of the problem, and can start looking at where costs can be reduced to balance the equation.

Free up cash – cutback on costs
Take a long hard look at your expenses/outgoings. Can you do without any of these? or reduce these? ANY costs you can reduce will make cumulative benefit against your debts (that is, £10 paid off, saves the £10, but also the interest that would be payable on that £10 the next month (say £11); and saves the interest on the £11 the following month…).
Common targets:
1. Change frequency of expenses – can your hair last another week between haircuts? Beware of doing this for safety items like new tyres.
2. Change shopping brands – Do you need to buy brnaded items? You may want to try a cheaper brand for some products, and see if they are just as good. This method can save £100’s in a year!
3. Holiday locally – Do you really need to go abroad for a holiday? How about staying with family for some family fun, and a less expensive holiday? This doesn’t have to be forever, just save the odd holiday and you may have £100’s to payoff debts.

Relocate your debt
Review the interest rates you’re paying, and where your debt lies. It’s not uncommon at all to find that debt is in some of the worst interest rates available to that person (often credit cards). If you have a mortgage, you can look at options to take a “payment holiday”, so you can put that money to better use paying off other debts. Otherwise look at options available between your current debts, or even new credit cards. Some new credit cards offer 0% on “balance transfers” (transferred debts). Beware however that this is offered for a reason…. their interest rates will be very high once they kick in. To use these, you need to have a plan to payoff the debt before the interest rate kicks in. Also be careful not to use the card for daily spending, as balance transfer cards pay off the 0% debt first.

Prioritise debts
Now you’ve found the best layout for your debts, you need to prioritise paying them off. This means ensuring you’re paying off the most costly, and that you are not breaking credit rules and risking court action/repossession. Ensure you know the order of debt payoffs, and the limit of each for a month.

Have a clear spending plan
I don’t personally recommend to have a spreadsheet showing how much you can spend on toothpaste this week, but DO ensure you know how much you can afford when going shopping, and challenge yourself to spend less, to place the rest against your debts for the month.

1. Motivate yourself – it’s easy to lose motivation and go back to old habits… e.g. motivate yourself by ploting your planned debt reduction on a basic graph (showing debt coming down hopefully).
2. Congratulate yourself – take time to acknowledge improvements you’ve made, and give yourself a pat on the back (avoid congratulating yourself by buying something obviously!)

All the very best in your aim to rid your of personal debt. Feel free to comment if you feel there are other items that should be included in this post.

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