Debt is a difficult situation to find yourself in, and can make you feel like you’ve lost control of your life’s direction. Don’t worry though, there are ways of taking control back, beginning with these five steps:
Step 1: Organising your Debts
One of the first steps towards successfully making it out of debt is to make sure that you know exactly what each of your debts consists of.
After making a list detailing amounts, interest rates, creditors, and current monthly payments the next step is to prioritize which debts should be paid off soonest. These should be the debts which will do the most damage to your life if left unpaid, such as rent or mortgage payments, electricity, water and gas bills, and Council Tax.
After these are paid off, the next debts to be prioritized should be those with the highest interest rates or lowest amounts, as removing these debts can be the quickest way to make a sizeable impact when it comes to your overall payments. A smaller debt is easier to deal with due to its size and once paid will no longer accumulate interest, while a debt with a particularly high-interest rate can become dangerous if left unpaid for too long.
Organising your debts in this way can make it much easier to deal with each of them, as it becomes harder to get overwhelmed when you are aware of each of your individual debts.
Step 2: Budgeting
After working out your overall payments, putting that money aside each month can be difficult without a detailed budget.
In making this budget, it is important to find out if there are any luxury items which can be cut out of your spending, as well as exploring the possibility of switching to cheaper brands for your essential items.
Public transport can also be cheaper than driving to work each day. Another way of cutting costs could be switching energy suppliers to make sure you are getting the best deal possible. Switching credit cards for a better interest rate also lowers costs, though it is important to be aware that special offer rates often rise quickly after a low-interest period, and a card with a slightly higher but stable interest rate might be more helpful if you have trouble organizing your finances.
Another way of budgeting successfully is to find a way of increasing your income, such as taking on a lodger if you have a spare room or asking grown-up children to contribute towards rent/mortgage and bills.
Ultimately, budgeting comes down to personal choice, as some cuts could be more difficult for you to make than they would be for others.
Step 3: Seeking Debt Help
There are various ways to seek debt help, including Debt Consolidation Loans, Individual Voluntary Agreements, and Debt Management Plans.
Debt Consolidation Loans are used to pay your existing debts and therefore turn your multiple payments into one large monthly payment. This can reduce stress by lessening the planning needed to pay back each of your debts, and may also lead to a lower rate of interest than those you are currently paying.
Individual Voluntary Agreements are arranged through an Insolvency Practitioner and are a form of debt management agreement which freezes the interest on your debts if you pay an agreed amount over a fixed period to your creditors. Your debts will even be written off once the agreement is complete.
A Debt Management Plan is an agreement between you and your creditors to pay off your debts in installments. This is organized through a Debt Management Company, so your payments are made to the Company, who then spread them between your creditors, though a fee to the Debt Management Company may also be included in your payments.
All of these options have their own advantages and disadvantages, so it is important to seek professional, impartial advice when it comes to choosing a method for handling your debt. For more information on debt help available click here
Step 4: Emergency Fund
Establishing an emergency fund, no matter how small, can be helpful when dealing with debts, both in the case of an actual emergency and for creating a personal sense of security.
The amount you keep in this fund should be somewhere between three and six times your normal monthly expenses to be enough to cover the cost any crisis which could occur. While building this fund up can be difficult while paying off several debts at the same time, it should be part of your monthly budget. This may mean that you need to set a low target, to begin with, making small payments into your fund each month, but this will soon amass a healthy emergency fund.
This fund being in place can be helpful in the case of accidents, job loss or damage caused by natural disasters such as floods, as these crises don’t have to derail the process of repaying your debts if you have enough money set aside to support yourself through these events.
It may not be possible for you to build up a fund like this in your current situation but if it is, it is a recommended strategy for avoiding slipping further into debt.
Step 5: Take Care of Yourself
An important part of dealing with debt is making sure you remain in control of paying these debts. This is difficult to do when struggling with the mental and physical health issues which can be caused by debts, the pressures of the situation leading to anxiety and stress.
Talking through the situation with a family member or friend can help, though if you find this difficult, seeing a health professional about health issues caused by debt is nothing to be ashamed of.
Budgeting can also lead to being unable to participate in social events due to a lack of funds, leaving you feeling lonely and left out. Fighting this feeling of loneliness can be difficult, but there are many hobbies which don’t involve money and can help create new friendships and connections. Sports, in particular, can help you maintain your physical health and maintain a healthy social life.
While these measures may not deal with your debts directly, it is important to make sure you are in a fit state to deal with the pressures created by your situation.