Another new year. Another new debt. Well, at least for some.
One in ten people will still be paying off their Christmas debts next year, according to research. While the majority of people will take an average of six months to pay off their debts, some 10% will still be in the red next Christmas, according to research by comparison.
Christmas is a renowned time for excess, from food to gifts, it’s the season of over-indulgence. But is financial excess really worth it? We share a four week guide to getting your finances in shape.
First week
Sit down and work out exactly how much you owe and who you owe it to. Be honest about your options for the future. If your debt repayments take up more than 20 per cent of your net monthly income then you are entering a danger zone and must take steps to cut back.
The next thing to do is to draw up a budget including a schedule for repaying your debts. Make sure you prioritize any repayments that are essentials i.e. if non-payment would result in the loss of home or essential items or services.
Be realistic with your repayments as this will help you stay within your budget. The most important part of this first week is to be disciplined – get your plan sorted and don’t plan to borrow any more money until you’ve repaid what you already owe.
You might find that watching your daily spending will help you stick to a budget. Have a practice run of taking money out at the beginning of the week and put your card in a safe place, that way you won’t spend more than the cash you have.
Second week
Look at where your debt is and whether it could be moved. Is it on a credit card where you’re paying a high rate of interest? If so, then you might be able to find a different provider offering a better rate.
There are many providers offering 0 per cent interest or “Interest free” periods and while they are limited they help you repay your debt without incurring more interest.
Of course, many of the best rates are only available to people with excellent credit ratings, but even without this you could be able to shift debt to a better rate. Do research yourself with our credit card finder.
If you have more than one credit card then you might be considering taking out a loan to consolidate your debts. Ideally you want to find the quickest and cheapest method for repaying your debts. To do this, work out how much you can realistically afford to repay each month versus how much interest you are paying. This will help you work out if a loan will be cost effective.
You can also use a credit card reality check calculator to work out how much you have to repay. If you have a loan, you can also use a loan repayment calculator to work out how long (and how much) you will have to repay. There are many tools online and most financial institutions have them on their websites.
The next thing you should do is get rid of your store cards. They carry by far the highest rates for credit, so if you’re finding it hard to manage these debts then you should look at paying them off and throw them away.
Third week
This week you should look at organizing your bills and make sure you’re not paying out extra unnecessarily. Make sure all your utility bills are by direct debit monthly – this will save you money and is one of the easiest ways to cut your bills. A lot of utility companies are now charging for a paper invoice. It may also lessen the risk of ending up with a big quarterly bill you can’t afford.
If you’re with a large financial institution, this means that you’re probably not getting the best deal on your overdraft or interest rates. The rise in the number of online internet banks means there is far more choice, so it makes sense to switch and take advantage of offers such as fee-free banking and lower overdraft rates. You could save yourself a lot of money just by switching to a new current account. If you have savings you can also look at putting them in a higher interest account.
Fourth week
If you have a mortgage it is probably your biggest expense each month, so it’s important that you have the best possible deal. You should speak to an independent financial adviser and mortgage broker about your remortgaging options and if it looks like you could save money then you can make the switch. If you have plenty of equity in your home you may be able to clear unmanageable high interest debts with a bigger mortgage, which will come with a lower interest rate
Don’t forget to take into account any transfer or discharge charges from your current provider and any legal fees for switching. Weigh up the all-in cost of remortgaging before you decide if it’s worthwhile, you may still find that the savings you’ll make with a new mortgage will more than cover any transfer expenses.
If you rent your property then you could look at moving to cut the cost you pay each month – although this will usually mean initially paying a new security deposit. At the very least you should set up a direct debit from your bank account so that you never pay a late payment fee or interest for not paying your rent on time.
Take a look at any insurance policies you have and see if you could save any money. You can often get cheaper auto or home insurance by phoning around, consulting an insurance broker or looking through an online broker.
After January
Keep ploughing on. It might seem that you will never get there but starting to get debt free is the hardest part. Once you are on the right road, you’ve got to keep going. Good luck.
What if things get too much?
Speak to someone immediately. If you feel that you can’t repay your loan or keep up with your credit card payments then contact your provider, they will be able to set up a repayment structure for you.
There are companies that will negotiate with lenders on your behalf to work out a manageable budget based on how much you can realistically afford to repay. Many lenders are open to negotiation as they would prefer to get some of the money they are owed back than for the debtor to declare themselves bankrupt and lose the lot.
Media is full of adverts from debt management companies telling you that they can help transform your debt into manageable chunks. What they don’t tell you about is the high level of fees and interest they charge for the privilege.
If it is more serious then there are resources that provide independent advice. Northern River Financial can provide this assistance. Staying on top of your debt servicing is the first part of Keeping Life Current.
