This is a guest post by the amazing Francesca over at frompenniestopounds! She’s had experience with debt, and overcoming it, so I thought who would be better to give some advice on how to start paying off your debt!
The Frugal Frenchie
When you realise that you have a bit of a debt problem, it can be a bit overwhelming in knowing where to start tackling it and making a plan to get rid of it completely!
Paying the minimum payments each month is the slowest possible way of doing it, not to mention spending an absolute fortune on interest costs. Paying off your debt is one of the best feelings ever, as crossing the monthly payment amounts off your budget is so satisfying. Furthermore, without debt payments, you are freeing yourself up for better things, such as money spent on holidays, retirement, having fun, and security for your family.
Add up all of your debt
This is the first step, but it can definitely feel like one of the scariest. Ignorance is bliss, and knowing that you will have the numbers in front of you and can’t avoid them, can be pretty overwhelming, and quite frankly, upsetting. It will all be worth it, however – once you’ve started tackling the debt you’re on your way to getting it sorted and being financial free again!
Go into your internet banking and look at the direct debit/standing order section, as this is where the monthly debts that you pay the minimum payment for will be. Have a look at your bank statements (either online or paper versions) and check through to see if there are any other payments that you make towards loans etc that you may not have direct debits set up for. Do you pay some of your debt in cash, e.g. for kids classes?
Write down all of your debts and how much you owe in total, and how much the monthly repayments are currently. Don’t worry about what order to put them in yet as we will be tackling that in the next step.
Find out the interest rates
This is really, really important, and not something that you should skip despite the temptation. It’ll probably mean going back through all of your paperwork to find out when you took the debt out and which interest rate it was on.
Go through all of your paperwork, and if you can’t find it, make sure that you find out the interest rates and when they run out/increase. If you can’t find the paperwork then you will have to ring up the company in question and ask them.
This is essential as you could be paying out a ton of money on something that you don’t need to be! Interest means that you will end up spending potentially thousands more than you need to, especially as interest rates aren’t fixed – so they will likely increase after a certain period of time… definitely look it up or ring the company!
Interest rates are also a good way to look at which debt to pay off first – do you pay off the debt with the highest interest first, which will probably make sense mathematically, or do you go for the smallest debt first for the psychological benefits? This is a completely personal choice, there’s no right or wrong answer; whichever is of biggest priority to you.
Once you have found your interest rates for each of your debts, it may be time to look at doing a balance transfer. Please note that this is not for everyone, and you need to be sensible about this. You need to know that you will not – under any circumstance – give in and go back to getting into more debt.
If you are 100% committed to paying off debt and know that you will not slip up, you can look at getting a 0% balance transfer. I personally did this for one of my credit cards when I was paying off debt, and it saved me loads of money in interest.
However, doing a 0% balance transfer means taking out a new line of credit – which not everyone will be eligible for. A good resource for this is Money Saving Expert, where they will be able to tell you if you are likely to be accepted or not, and the best ones that are out there.
Even though a 0% balance transfer sounds amazing, don’t forget that it’s like most debt – the interest rate can change. There are usually set dates when the 0% interest rate will vanish and the interest rate will go up again. This is something to bear in mind if you do decide to go down this route – will you pay it off before the 0% runs out?
Create a budget
Budgets are one of the most efficient ways of making sure that your money is working as best for you as it possibly can. After all, no-one wants to spend their money on pointless stuff, do they? If you could spend less money on your electricity bill and then have that extra money for a night out or something fun (even paying off debt, I promise you that it does turn into a bit of a game!), you would, wouldn’t you?
When it comes to making your budget, start with all of your incoming money – salary (after tax), benefits, child maintenance etc. This can be a bit more complicated if you don’t get the same amount every month coming in but don’t worry, just put down the average or minimum amount that you will definitely be receiving.
The next step is the one that most people find the trickiest, because if you don’t already have a budget or aren’t keeping track of it, you may not have a clue how much is going out of your account each month. I’m talking about adding up all of your expenses. Go through your bank statements (either on your internet banking or paper statements), and add up everything – this will enable you to get the best picture of the money that is going out of your account each month. If you guess on the variable expenses e.g. groceries, you could leave yourself short.
Your internet banking should also have a section that lists all of your direct debits and standing orders and the dates that they come out, but don’t forget any expenses that you pay for annually such as car insurance.
My favourite way of budgeting is the zero-sum method – which is where all of your money is allocated. So for example, say you have your income at £1000 per month and your expenses at £800 (in an ideal world mine would be this low!), this would leave you with £200. The temptation to spend this £200 on whatever takes your fancy is too strong, so instead of leaving yourself that money floating around, you allocate it – for example £100 into your savings, £100 towards your Christmas fund.
Reduce Your Expenses
Now that you’ve got all of your expenses listed, you can see exactly how much is going out of your account. But what if you could have less money going out each month? You can do this by cutting out things – such as cancelling gym memberships, cinema passes, TV packages etc, and you can also do this by switching providers on what you currently have e.g. TV, internet, electricity etc.
It is quite overwhelming to try and reduce all of your expenses at once, so perhaps pick one to focus on at first and see if you can get it cheaper elsewhere.
Earn Extra Income
Now that you’ve got your expenses as low as you possibly can, the fastest way to then get rid of your debt is to increase the money that is coming in. A great thing to do is aim to have one or more income streams dedicated solely to paying off your debt – that way you don’t have to reduce your expenses any more and feel too deprived.
Ways that you could earn extra income could be:
- Matched betting
- Mystery shopping
- Answering surveys
- Dog boarding/pet sitting
- House sitting
- Freelance writing
- Entering competitions
- Selling your stuff on eBay, Gumtree, Facebook marketplace, car boot sales etc
- Re-selling (where you buy stuff cheap and sell on for higher prices for a profit)
Are you on a debt payoff journey? Are there any tips that you could add to the above?