Manage Your Finances and Get Out of Debt
Introduction
There was a time when there was a significant social stigma attached to debt, and even more so to financial failure and bankruptcy. This is no longer the case however, particularly with Britain in the grip of the worst recession since World War II, with the number of people out of work exceeding 2 million for the first time since 1997, and home repossessions up 50% year-on-year in the first quarter of 2009. In fact, at the end of March 2009, the total personal debt in the U.K. stood at nearly £1,500 billion. That figure translates to just over £9,000 per household, excluding mortgage loans, or just over £21,000 if the average is based on households that have an unsecured loan of one form or another.
Managing Debt
The simplest method of managing debt is not to get into debt in the first place, but, for many people nowadays, such trite advice is simply a question of closing the stable door after the horse has bolted. It is true of course, that, in an ideal world we would all set ourselves financial goals – whether they be lucrative savings and investments or a luxury holiday from time to time – to suit our lifestyles and manage our finances so that we achieved those goals without going into debt. Practically, however, few of us are disciplined enough to adopt this approach, and the chances are that most of us will find ourselves in debt at some point in our lives.
The secret of managing debt effectively – that is, to make your financial situation better, not worse – is to recognise that you are in debt and resolve to tackle the problem in a calm, but forthright, manner. Being in debt can induce panic, a state in which it is difficult to make calm, rational judgements, but, at the other end of the scale, burying your head in the sand and hoping that the problem will go away by itself is equally ineffective. If you find yourself in a situation where you do not have enough money to pay your bills and other outgoings, your spending habits need to change, and the sooner the better.
Don't be afraid to tell other people – family, friends, or one of the debt charities if need be – about your financial situation. Your family needs to contribute towards your decision making, while friends, and particularly debt charities – such as the Consumer Credit Counselling Service (CCCS) or National Debtline – may be able to offer practical, impartial advice free of charge and without obligation. Remember, even in the case of minor debt problems, there is plenty of truth in the old adage, "A problem shared is a problem halved."
If you are facing major debt problems which have been allowed to accumulate over a period of time, you may need to face up to the fact that an informal debt management plan, a formal, legally binding IVA ("Individual Voluntary Agreement") or even bankruptcy, may be the only realistic method of freeing yourself from debt.
If on the other hand you are able to recognise that you are living beyond your means – that is, spending more than you earn on a regular basis – it may be possible to free yourself from debt simply by budgeting more effectively. You don't need to be an accountant to draw up a personal budget, but what you do need to be is thorough and honest with yourself. The whole point of personal budgeting is to prioritise your expenditure and live within your means, so you need to write exactly what you spend on what each month.
Essential outgoings – that is, items such as mortgage repayments or rent or utility bills, that can result in repossession, eviction or disconnection – should be top of your list, followed by non-essential outgoings such as credit or store card bills, if there is sufficient money left over. This latter category can obviously still result in impairment of your credit rating and criminal prosecution if left unpaid for any length of time, but does not immediately affect the roof over your head, or your health and well-being. Paying your utility bills by Direct Debit, set up to be taken from your account the day after payday, can help you to make sure that there are sufficient funds available. Utility companies typically also offer a discount, of 5%, or so, to customers who pay their bills in this way. Similarly, paying just a few pounds extra off a credit card balance of a few thousand pounds can literally take years off the lifetime of the debt, while paying a few pounds less can result in a debt that is effectively never paid off.