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Planning is crucial if you want to make a change.
In January 2014 the Money Charity released statistics showing that the average personal debt at the end of 2013, excluding mortgages, was around £6,000. So, if you’re currently in debt, then you’re not alone. However, you don’t have to remain in a situation like this if you don’t want to, as getting debt free is easier than you might think. If you’re looking to 2015 and thinking that’s the year that you want to reduce debts or clear them altogether, then all you need to get started is a good plan.
1. How much do you owe?
It might seem like a rather obvious place to start, but without tackling this essential question, it’s impossible to formulate an effective plan to get to the bottom of debt issues. Sit down and make a note of absolutely all your debts, from overdrafts and credit cards to any monthly payments being made on a car or a loan. Add up your totals so that you can see the entire debt outstanding – i.e. How much debt and interest needs to be paid before you can consider yourself free from debt.
2. Where are you paying the most interest?
This is another essential step when it comes to getting yourself out of problems with your debts. Look at the rates of interest that you’re paying on your credit cards, as compared to an overdraft or other lines of credit and identify those with the highest rates. Do you have any debts that you’re regularly incurring charges on i.e. for going over an overdraft limit or missing payments on a credit card? Paying more interest than you need to and forking out for extra fees and charges are additional barriers to repaying your debts that you just don’t need.
3. Can you switch?
If you want to start paying off debts, then often the best place to start is to reduce the interest you’re paying for them – starting with those debts that you’ve already identified as costing you the most. If your highest interest rate is attached to a credit card that you’ve had for several years then investigate whether you can move the debt to a 0% interest or low interest card. Without the extra interest you’re immediately making the debt easier to handle. If you have credit card debts that are unmanageable and the interest rate is far too high then would it be cheaper to switch to a personal loan? For many people moving a debt in this way makes it simpler to manage – scheduled repayments over a specific time period rather than paying off what you can when you can – and interest rates on personal loans are usually lower too.
4. Cut up your cards.
This may be a step that’s not open to everyone, but if you have credit cards and store cards that you’re struggling with then simply cut them up and stop using them. We all deceive ourselves a little when it comes to purchasing items that we ‘want’ rather than ‘need’ and if you don’t have the credit cards to buy those extras then you’re much less likely to make purchases in the first place. Plan to try and pay for items in cash too – sometimes the act of going to the cash point to retrieve the money can give you a moment of pause in terms of whether you actually really want to make the purchase and understand that it’s your hard earned cash you’re using to pay for it.
5. Where can you make savings?
Part of paying off your debts is freeing up money from other income sources so that you can repay those debts faster. So, when you’re planning the debt repayments start working out how to cut your expenditure too – whatever you work out that you can save, you can then put towards your repayments and clear those debts faster. Start by looking at your basic monthly costs to see where you might be able to cut down on expenses. For example, could you save on monthly energy bills by switching providers? Could you start road running and cut out the gym membership? Could you reduce the amount of money that you spend on alcohol every month while still having a life? Get clever with your outgoings so that you can use more of the money that you have coming in for clearing those overhanging debts.
6. Be disciplined.
Essentially, you’re committing to making a very positive life change, but this might require a rethink in some of the habits that you’ve fallen into and that can be tough to achieve. Plan to keep a record of everything you spend over a month and at the end of it identify where your weak points lie in terms of discipline. Do you cave after a hard week at work and spend a fortune in the pub on a Friday night? Do you blow money on takeaways? Do you always end up going shopping in your lunch hour on a Monday? Many of us spend emotionally, whether that’s to take away the effect of a bad day or to comfort ourselves when something bad has happened, but if you’re doing this on a regular basis then you’re making it much harder to get those debts cleared.
7. Speak to your creditors.
Generally, most of us don’t consider approaching a bank or credit card company and trying to negotiate our conditions of credit. However, if you’re really struggling with your debts and you can’t see a way to pay them off then this is worth doing. It may be that you can negotiate a lower interest rate or get some recent charges refunded as a goodwill gesture. While banks and credit card companies are not naturally empathetic bodies if you demonstrate why it’s a good idea to give you what you’re asking for them can sometimes be persuaded.
Often, making the decision to become debt free is the first step on the road to getting there. Having a plan in place will make sure that you keep your eyes on the prize.