Guide: How to Avoid Getting in Debt
1. Have a Plan
Why have a plan?
The best way to avoid debt is to get your finances under control. And if you’re going to try to get your finances under control, you’ll need a plan.
At first, this doesn’t need to cover everything – that’ll come later. But it’s a start, which will help you to set up everything else.
Essentially, to get your finances moving the way they should, you may need to change some habits. This includes some that you may not even realise that you have. It is particularly important, as habits can cause problems even if your intentions are good.
What should a plan consist of?
Your plan doesn’t need to be too in-depth just yet. At the moment, it can be a fairly simple one. You don’t even need to open a spreadsheet, as this can just be a few lines written down.
All you need, right now, are three things:
What’s your income?
You should know this already, but make sure you’re not going on your pre-tax income (even if you’re self-employed). How much do you actually make a month? Write this down first, so you know what you have to play with in the first place.
What are your major expenses?
It’s entirely possible that you have these all on direct debit, so you don’t know off the top of your head, but it’s worth checking. For now, let’s just go with the real basics – rent or mortgage, utility bills and major payments like mobile phone contracts and credit card bills. This won’t be your complete monthly outgoings, but at this point, it’s all about taking stock.
What is your desired goal?
What do you actually want to achieve? Do you want to pay off debt, buy a car, put down a deposit for a house or just start having some savings in the bank? Whatever it is, a goal is easier to achieve if it isn’t vague. Make it definite and you’ll be in a better position to actually achieve it.
What should a plan be able to achieve?
It’s important to know what you have before you start making financial decisions. This is the same for businesses and people – know what your assets are. There’ll be more detail to come, but for now, it’s about taking stock of what you have and what you need to do. Once you know them, then it should be easier to start working out what you need to change to achieve your goals.
2. Create a Budget
What does a budget do?
A budget is a more in-depth look at your finances. You probably will need to take more time over this, either with a pen and paper, a computer or an app on your mobile.
Here, you should go further into your details, including all regular outgoings. This doesn’t just mean standing orders and direct debits – look into regular shopping as well. How much do you spend on food a week? How much do you spend on lunches if you eat out near work? How much do you spend on morning coffees?
A budget can be a one-off creation, but it can also be a living document (and arguably works best when it is). This allows you to keep track of what you’re actually spending each day as well as what you think you’re going to spend.
As a result, it’s worth taking your time with your budget, unless you have recent receipts to hand. Those small differences (coffees, petrol, snacks) can sometimes add up quicker than you may expect.
By the end of a few weeks, you’ll have a far more realistic idea as to your spending. It’s important to try to get everything, even if they’re not planned expenses.
If you split your outgoings into three types, it’ll help clarify where you can start to make changes. Split them into 3:
- What you have to spend (What you are commited to, like mortgage/rent, utility bills, etc)
- Things you feel you should spend money on (gym memberships, work clothes, etc)
- What you like to spend money on (magazines, snacks, drinks, etc).
Once you’ve done this for a while, you’ll be able to start getting an idea where you can cut costs.
How is it different to a plan?
The main difference is in the level of detail, but there’s also the idea of a budget being a document that you keep updating.
If the plan is the goal, then the budget is the process that helps you to achieve it.
What should I be trying to achieve with it?
Ideally, your goals should be measurable and realistic. You’re unlikely to be able to save for a new car in just a couple of months, but you could have saved a hundred or two pounds. Or you could have paid off some debt. Whatever you do, you shouldn’t expect to see huge results straight away. It’s all about changing habits over the long term.
What you should be able to see, though, are minor improvements. A little bit of extra cash, or more cash spent on the right things.
Also, you should be aiming to get a better feel for your finances generally. Keeping track of what you’re doing and what you’re spending should help you with that.
3. Maximise Income
Can I do this?
Most people can, in one way or another, earn more than they’re currently earning. Maybe not much, admittedly, but it’s worth finding out if there are small things that you can do that you can earn money from.
Of course, the most obvious thing is to consider if your job is paying the amount that you want. It may be a good idea to start considering your options with regards to your employment. This will depend on where you work and how long you’ve been there. After all, it’s never a good idea to make snap decisions. But you can start looking and seeing if there are other opportunities. Or, you can have a discussion with your employers about how to progress your career.
It also may be worth looking into things you can do in your spare time to earn money. Do you have other skills you’re not exploiting? Are you a writer or artist, are you into crafts or music?
What should I look into?
There are plenty of sites that will offer you cash back on purchases – these can be signed up to online. If you can make them a habit, you can effectively get paid to buy a lot of the things you would have purchased anyway.
To use them, you’ll need to search for the items through the cash back site to see if they’re an affiliate or not. Things like flights and hotels, credit cards and loans are often items that you can receive a decent reward on.
The way they basically work are as brokers. A broker introduces the customer to the supplier (much like Cash Lady does with lenders). In return, the supplier pays a commission to the broker. With cash back sites, the idea is that the commission paid is more than the amount that they give you in cash back – so you get money while they get paid as well. Although it’s important to make sure you don’t get carried away and start purchasing things purely for the cash back!
Side income options
Another option, that you can easily do in your spare time, is to try out various surveys. There are many survey sites out there that are looking for people to share their opinions. Many of them pay – it may not be much per survey, or they may translate into something like nectar card points or vouchers. They can build up over time. Generally speaking, the longer the survey, the more they pay.
A final option, and it’s an obvious one, is to try to make some money from things you own that you don’t use any more. Sites like ebay and moneymagpie. Shops like CEX and CashConverters or just good, old-fashioned car boot sales (and yes, they do still go on regularly). These can be ways to take used books, DVDs, computer games and electronic items and turn them into cash.
Unless you own rarities, don’t expect great rates for them, but even a small amount for each item can mount up to a decent amount. Especially if you’re doing a fairly large clear out. And, on top of that, you’ll gain more space as well. Although do make sure you check what the going rates are before you put them up for sale. You may be sitting on an item that’s difficult to find and not be aware of it.
4. Cut Down on Bills
It’s always worth taking the time to find out if you’re paying the minimum you could actually pay for the service you’re receiving. Companies can vary in the prices they offer to a surprising extent. Also, depending on when you started using a company, you may not be on the best deal. If you’re a good negotiator, you could reduce your regular outgoings significantly.
Use Comparison sites
This is really how and why comparison sites started. The ability to look through different providers of, essentially, the same product in your area, and see who can offer the best deal. After all, a lot of people stay with the same providers for years purely because they’re the providers they’ve been with for years.
It used to be a lot more hassle to switch providers. Today you can see the offers more simply. The difficulties in contacting them have been mostly removed and you could easily switch.
Comparison sites offer a one-stop-shop for all kinds of providers, including (but not limited to) gas, electricity, phone, satellite/digital, broadband, mobiles… there are plenty of options. You can also find products on many sites, showing where the cheapest place is to buy larger items.
For some products, you may need to give more information in order to find out how much something is. This is particularly the case with things like insurance. The amount that it will cost will depend on various factors that you’ll need to tell them.
Contact your providers
If you find a better rate, your provider may be willing to match it – or even better it – in an effort to get you to stay. No business wants to lose clients, so some may offer you a temporary deal in order to convince you to stay a bit longer.
Firstly, make sure you actually have a better offer that you can go to, as that’ll give you confidence when dealing with them. Secondly, be prepared to actually change providers. Ideally, what you want in this situation is to be passed to the customer retention team. It may happen or it may not – if it does, it’s worth being open to what they’re offering. You may even get a better deal out of it.
Pay off debt
If you owe a provider, you’ll have difficulty changing – you should make sure you pay them first, not least because otherwise, you could end up paying two providers for the same amount of time. Also, if you’re trying to negotiate a better deal, it can be more difficult if you don’t have any bargaining chips.
5. Use Credit Wisely
Credit can be a useful thing in many ways, as it allows people to spread out their purchases and repay over an amount of time. Alternatively, it can be a way to gather rewards and bonuses while spending on the things you’d have bought anyway.
It can also be something that can lead to major debt problems if not used wisely. This is why it’s vital to know what you’re doing when it comes to using credit, otherwise you could end up having major problems.
Pay them off as much as possible
This is the key thing about credit cards. You can either pay to use them or you can use them to save money.
The trick with credit cards is to avoid seeing them as money to be used. Far too many people use them like it’s a race to spend all the money on them. Instead, you should aim to repay the entire balance each month if possible. If this isn’t possible, you should certainly aim to have the minimum balance you can.
If you don’t do this, you can end up paying the minimum interest each month, which effectively means that you’re going to be paying to maintain debt. The higher your balance, the larger amount will be taken out of your regular budget without actually paying any of the main amount.
Also, if you take out a short term loan, it’s even more important to pay it off in one go – that’s how they’re designed to be used, after all. If you don’t, you could end up paying a lot more in interest than you need to.
Use rewards if offered
Some credit cards offer rewards and points if you use them. If you have the balance to do so, this can make it worth using your credit card to handle regular purchases. You will be earning points and rewards where appropriate. These can take the form of cash back, vouchers or air miles. Some offer points, which can be built up and traded in for various items.
This means that you’re using credit in a way that gets you more. However, if you go into a negative balance with the credit card by the end of the month, most cards won’t give you the rewards and you’ll need to pay interest on top of that.
Check our other guide
This only gives a quick overview of credit cards. We’ve written a far more in-depth look at them in our Guide to Credit Cards.