How to manage your money when you are getting out of debt
Life can be challenging when it comes to managing your money when paying off your existing debts.
We’ve written this quick article to give you a few tips to help you stay on track.
Tip 1: Analyse your current spending to see how much you can afford
By setting yourself a budget for your monthly spend, you will know how much you expect to spend and earn per month. Any money that is left over at the end of the month can be used to pay any debts so that you can get debt free quicker. Through setting a budget, you’ll also have a better understanding of what you spend your money on to see if you can make any savings or cuts on spending.
As well as budgeting to start paying off your debt, it is also recommended to start an emergency saving pot, so that you can pay for any sudden expenses such as car repairs, boiler repairs or upcoming insurance renewals.
Tip 2: Pay off debts in the correct order
Paying off debts in a specific order may help save money or even help to clear your debt faster, but firstly there are some key commitments that you must cover:
Minimum Payments
When you take out a loan, credit card or any other form of credit, you usually agree a minimum payment that must be made to that company. If this payment is not made, you can be ‘fined’ by the company, and if you don’t pay within a certain time period, your account can be passed to a legal professional.
Tip: Always pay at least the minimum payment, as if you don’t, this could show on your credit file and make it more difficult to borrow in the future.
Priority Debt
Debts such as these must be paid, as they can get you in to serious trouble if they are not. Priority debts include:
– Your mortgage or rent
– Utility bills such as Gas, Electric or water
– Council tax
– Child Maintenance
If the following debts/expenses are not paid, you may lose your home, lose necessities such as water or even be summoned to court.
Do not ignore these debts, and approach them, even if you are behind, as this will help you in the long run.
So, now that you’ve taken care of your minimum payments and priority debts, you can then focus on your other debts.
There are two methods of prioritising your other debts, there are:
The Snowball Method – good for getting into good repayment habits:
1. Write out all of your debt balances from smallest to largest
2. Pay the minimum payment on all balances except the smallest. Try to pay extra into the smallest balance so you clear that debt quicker
3. Now the smallest is clear, roll what you were paying into the next smallest balance. And then repeat this until you are finished
The Avalanche Method – for tackling high-interest debt:
1. Lay out all of your debts from smallest to highest interest rate
2. Pay all of the minimum payments, except the one with the largest interest rate
3. Like the snowball method, try to pay extra into the largest interest rate balance, and start moving onto the next largest once this is complete. Then repeat, until you’re debt free!
Try consolidating your debt into just one manageable payment
If you would like to reduce your total monthly debt repayments and total interest, then a debt consolidation loan could be right for you to reduce your total APR.
You should only consolidate with a loan if you are being offered a lower APR than your existing borrowing. In doing so, you’ll reduce your monthly repayments as well as the amount of interest you pay over your loan term. If you find a loan that offers this while not extending the term you have to pay then you will be debt-free quicker.
At First Defence Finance, we help our members with debt consolidation, and you can find out if you can save on your repayments using our calculator here.
When borrowing with us straight from your pay, you can also be sure that you won’t miss any repayments.