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How To Control Your Debt And Control Your Life.
Introduction.
This article is for those of you who would really like to get your debt under control. Our business helps people who are experiencing high levels of stress due to debt. We are not talking about a level of debt that is a little irritating.
No, we are talking about enough debt so that you can no longer sleep at night or you wake up very early-(around 4am is favourite)-and cannot get back to sleep. The sort of debt that means your finances feel completely out of control, your relationships are beginning to suffer and you are no longer able to concentrate on your job, your business, your life.
What follows are the seven golden rules to stay out of debt. These rules are based on my experience of what people who are deeply in debt do not do. If you implement a couple of these rules you will soon control your debt. Implement all of them and you will never have a sleepless night caused by debt.
Rule One: Write out a budget.
To control your debt, it is vital that you write out a budget. If you write down all your estimated income and expenditure for the forthcoming year, you will have great difficulty in spending more than you earn. Having a budget will ensure that you plan for large expenses such as car insurance, road tax and MOT bills. This will help you remain in control. Writing out a budget will eliminate the chance of large bills arriving when you least expect them. Having a budget will encourage you to keep an eye on how your spending is going compared to your plans and will make going overdrawn almost impossible.
There are now some very effective, cheap tools available to help you construct a budget. Putting together an excel spreadsheet will keep you in control. A brilliant tip is to get together with your family to construct such a document. Even truculent teenagers will find it extremely difficult to insist that you buy the latest fashion or games console if they are aware of the family finances.
Rule Two: Credit cards
The most common cause of debt we come across is people using many credit cards. It is not unusual for people to be juggling ten or more cards. Whilst some people are capable of switching cards on a regular basis to take advantage of zero interest deals, many more find that the cards "run away with them" and end up in significant debt.
A key warning sign is paying off the minimum amount demanded by your credit card company. When these cards were first introduced, the minimum payments required were usually around 10%. This ensured that you paid off your balance in around a year and so resulted in reasonable interest payments. As an example, if your balance was £2,000 on a card with an interest rate of 17% APR, you would pay around £200 per month and clear your debt within a year.
However, those clever credit card providers soon realized that they could get a lot more interest from their customers if they reduced this payment. Currently one leading provider offers a deal where you can pay 1% of the balance. The dangers are clear. Although your minimum payment reduces to £31 per month, the amount of interest you will pay climbs to an eye-watering £5,890 and it will take you just over 33 years to pay off your debt of £2,000.
Rule Three: Keep things separate
One vital thing you must do to is to keep your accounts separate. If you are self-employed or run your own business, you need to keep these two aspects completely divided. If you find you are paying for personal items with your business credit card and paying for your business items with your personal credit cards, then watch out. Keeping control will become very difficult and if you mix them up completely, this will hide an under-performing business until your situation is really dire.
One simple action you can take right now is to sort out all the paperwork relating to your accounts into various sections and file them. This is the first act of many of our clients and makes a huge step on the way to control.
Rule Four: Pay priority bills first
To minimize the chance of you getting into sufficient debt to keep you awake at night, it is vital that you get into the habit of paying your priority bills first. Get into the habit of settling your bills for your council tax, utility bills and mortgage before spending your cash on meals, going out or the latest gadget.
Not paying your priority bills will result in threatening calls from your gas and electricity providers. Your Local Authority, the Inland Revenue and the VAT man will send bailiffs in to seize good to the value of your outstanding bill. Trust me, this results in huge amounts of stress and is to be avoided at all costs.
Rule Five: Keep your old car
There are some great deals available now but be careful in choosing which one you go for. Leasing can be a great way of helping you drive a new car. There are some interest-free deals available from a variety of dealers.
Whilst some of these seem to make sense, people who get into trouble with debt are often making large monthly car payments to a finance company, some then have a significant payment at the end of the deal period and find they can only finance this by taking out another agreement.
These deals can seem good but think about keeping your car for one more year…
Rule Six: Be wary of re-mortgaging
Frequently, the reason people seek us out is that they can no longer re-mortgage their house, due to the current credit crunch. Many people have re-mortgaged on a regular basis (usually every two years) and paid off the debts they have accumulated with the money raised.
On the face of it, this seems sensible. After all, the interest rate will be lower on the mortgage than the credit cards they are settling. Unfortunately, taking out large amounts of equity from your property to finance holidays etc. not only ensures you do not build up any value in your house, (which would be available to use in emergencies) but also makes sure that you live well above your means, counting the regular injections of capital as part of your income. This action alone can induce significant long-term stress and is the most effective way of putting strain on your relationships.
Rule Seven: Communicate with your creditors
This is probably the most important of all the golden rules. When you realize you are in difficulties, communicate with your creditors as soon as possible. Be honest about your financial position and ask them for help.
If you ignore any mail that arrives that is clearly from your credit card and loan companies and do not answer any call that shows up as "number withheld" on your mobile, then your creditors will have no choice but to either take legal action or pass your debts to a third party to collect. Either method will add penalty and admin charges, which will quickly add to your debt and your stress.
If you cannot bring yourself to talk with your creditors directly, then use one of the organizations who can help you. First port of call may be the Citizen's Advice Bureau or a commercial organization, such as ours.
Summary
In this article, I have set out to outline the most effective ways of making sure you avoid getting into the sort of debt that means your finances feel completely out of control, your relationships are beginning to suffer and you are no longer able to concentrate on your job, your business, your life.
This month, the credit card bills for Christmas are landing on our mats with a heavy "thud"!
If you follow the rules in this article, you will stay in control of your debt and never need our services.
Whatever you do, don't follow our Government's example by borrowing enough money to get out of debt!
Allan Smith is a debt coach, working for Debt-Medic, who are based in Wheatley.
If you would like to discuss any points raised in this article, contact Allan in confidence at: admin@debt-medic.co.uk.
Allan Smith
Debt Medic
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