The UK is a nation of borrowers and the word “debt” has a very negative stigma attached. It is important to understand that debt comes in many forms and not all debt is actually bad debt.
With the increase in property prices, it is next to impossible to get on the property ladder without taking out a mortgage. Many providers now have sensibly reduced the LTV ratio (loan to value) so that buying a property with a mortgage is an investment rather than a negative equity risk (owing more than the property is worth).
If you have balances on store cards, credit cards, or loans it is time to get your finances in order and start tackling your debt. These forms of credit are the easiest to get into trouble with. They are easily forgotten about and it is easy to get carried away spending your hard-earned money on cards rather than physically seeing how much money you are handing over.
The first step in tackling debt is to understand where your debt has come from. Are you consistently overspending every month and need to reduce your outgoings? Are those balances due to a holiday, new car, or home? – It is important that you understand WHY you are in debt.
1. Examine your spending
If your debt is on credit, store cards, or you have taken loans to cover these costs – look through your statements and see what you have bought. Think about your purchases; did you need them, do you use them, and were they good value for money? (Remember to consider the cost of any interest you are paying to understand the true cost of those purchases).
2. Create a budget
This is the most important stage in straightening out your finances. List your fixed income and your fixed outgoings (i.e. mortgage/rent, utilities, food). You can do this by gathering your past bills, receipts, and looking at your bank/card statements.
3. Analyse your finances
If you have consistently overspent each month, your debt will be an accumulation of small buys that total more than your income. Look at your budget and see what your available cash is each month. Make a plan to only spend what you have available and set aside a portion of this to repay existing debt. It is a good idea to pay off debt with any savings you may have – the rate of interest earned on savings is always less than what you are paying in interest on your debt.