How to get out of debt and stay out; 5 simple steps!
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Debt really is a word that we don’t want to hear. It can cause fear and panic, and also a great sense of shame. We can feel helpless and hopeless in the face of debt, and just want it all to go away.
The thing is, if you are in debt you are not alone. Debt is a secret problem for many people. According to The Money Charity, the average UK household debt was £60,403 in July 2020. This figure includes mortgages, which can be viewed as “good debt”, but also other debt such as credit card debt, which is “bad debt”. To understand more about the difference between good and bad debt, take a look at our article Is there such a thing as good debt?
But if you are struggling with debt, particularly bad debt, you can feel very isolated, even though many others are likely to be in the same situation. It is tempting to try and ignore it and carry on as normal. And being in debt can become a way of life that you just get used to.
But carrying debt long term is stressful and can limit so much of what you want to do in life. The good news is that it is possible to get out of debt – even in these difficult times.
So in this article we want to give you some pointers as to how to get out of debt and stay out. We can’t promise it will be easy, and you will need to be determined, but it will be well worth it.
How people get into debt
Debt is a slippery slope. Sometimes people get into debt for difficult personal reasons. For example, due to business failure, unemployment or domestic emergencies.
But more often debt can result from overspending, which builds up over months or years until it is out of control. For many people, this starts when you are young and begin to live beyond your means. At first this can be fairly minor things, for example beginning to buy little extras on credit cards. But after a while you are unable to repay the full balance each month, which means that the interest begins to mount up. Then if you keep using the credit card, before long you are up to your credit limit and just paying off the minimum each month. Despite this, you get another card to be able to buy more things with. And so it goes on. Before you know it you can be deeply in debt and unable to pay your way out.
What to do when you realise you are in debt
The essential thing to do is to face up to the amount of debt you’re in. To be able to start sorting out your debts, you need to know exactly how much you owe.
This is not easy. In fact, it can be stressful and frightening. But it has to be done.
So make a list of all the debts that you have and want to pay off. Include any loans, credit accounts (eg catalogues) and credit cards.
Then take a deep breath. You CAN get through this.
How to start paying off your debts
It is really important to make regular payments into all your debts, otherwise your credit rating can be affected. If you are in the position where you cannot manage to make minimum payments for each debt, then you may need some additional help getting started: see the What outside help is available section below.
But if you are still able to make some payments into each of your debts then you can start paying off your debt more quickly by taking the following five steps.
1. Be determined to get out of debt
You have got to want to do this. So make getting out of debt your goal. Treat it like any other big challenge in your life. Set yourself a timescale and find the best way of recording your progress. You can do this but you will need to give it 100% commitment.
Make sure you are prepared mentally and emotionally to make this happen. You will be so glad you did!
2. Snowball your debts
The first thing to do if you are able is to pay off as much of your debt as you can straightaway. So for example if you have any savings then use some of these to start paying off your debt. It is good to leave something for emergencies, but anything over and above this can go towards your debt. Savings interest rates are low at the moment so it would make more financial sense to put your money to work by reducing your debts and the interest you are paying on those.
This can be really hard to do, especially if you have been saving for something special. But it would be much better to use the money now to rescue your finances and then start rebuilding your savings once you are back on a secure financial footing again.
When paying off debts, a useful method is to “snowball” them. Think of a small snowball rolling down a hill. It attracts more snow as it rolls so it gets bigger and also faster. So a good way to tackle your debt is by thinking of your debt repayment as that snowball. You want to pay off more and more until the snowball finally crashes and is all gone.
So choose one debt to pay off first. This might be the smallest debt or perhaps the one with the highest rate of interest. Keep paying minimum repayment on other debts but focus on this one by overpaying as much into it as you can. Give it everything you’ve got and you will get rid of it as soon as possible. Then once it’s gone, don’t let up but transfer everything you were paying into that debt to the next debt on your list. And so on.
If you have a large number of small debts another approach is to consider taking on a debt consolidation loan. This is not to get into more debt, but to rationalise all your debts into one short term loan. Then you have just one monthly repayment to make and can put all your efforts into clearing this one debt as soon as you can.
3. Make a monthly budget
You need to make sure that you don’t get into further debt whilst paying off your existing debts. So as well as making debt repayments you also need to create and stick to a realistic monthly budget. This will enable you to see clearly where your money is going and make changes where needed.
Start by making a list of all your regular payments such as mortgage/rent, loan/card repayments, household bills, subscriptions etc. It is a good idea to set up direct debits for these payments so that you know that they will be paid and when they will be taken from your bank account. Then add to the list all other essential spending such as food and transport to work, and then any other things that you regularly spend money on.
You also need a list of all the money coming into the household. Include everything: salary or wages, tips, bonuses, benefits, plus any help from family or other sources.
You can then see what is coming in and going out and where any problems might be arising. You also need to check this budget carefully as it can be very easy to underestimate what you are actually spending. So it’s a good idea to record all your expenditure for a month or two in a notebook or on your phone. Then you will have a realistic idea of how much money is actually going where.
At this point, you may well find that you have less money coming in than is going out. This is why it can be tempting to keep spending using your overdraft or credit card. But don’t! Carry on reading to see a better way forward.
4. Reduce spending
This is where you need to be determined. Basically, to stick to a budget and get out of debt, you have to stop spending more money than you’ve got. So you need to check everything that you are spending to make sure that it is essential and also that you are getting the best deal possible.
Start by checking every bill to make sure that you are still using it. It’s easy to keep paying for subscriptions or insurances or guarantees that you no longer need without realising. So double check every payment you are making and cancel anything you don’t use. For essential bills, research whether you could get a better deal on services such as energy, TV/broadband, or phone. There are various comparison websites such as Money Supermarket that can help you to do this.
For essential expenditure you need to develop the mindset of always spending as little as possible. Start shopping around for everything you need. Food is one of the largest expenses for most of us, so check out our article How to eat well for less for tips on how to cut your food bills.
Also why not collaborate with any friends that are also trying to economise. Perhaps you could agree ways of helping each other out: for example, trade favours between you for areas such as car maintenance, decorating, haircutting, pet sitting etc.
But the key thing to work on is to find every single way possible to reduce your expenditure. This will gradually enable you to stick to your monthly budget and to continue to reduce your debt.
5. Increase income
In parallel with reducing your spending, you also need to find as many ways as possible of increasing your income. This will not only help your monthly budget but will provide more money to snowball your debts, and clear them quicker.
The ways you go about this will vary depending on your circumstances and the size of your debt, but you might want to try some or all of the following:
- Look for a new job that pays more.
- Take on a second job, for example an evening job or a home-based/online job.
- Sell goods that you no longer need.
- Take in a lodger.
You may decide to be more radical and sell or downsize your car or even your home. Whilst these are not decisions to be taken lightly, a brave decision now could make the difference between sinking in debt and moving forward into healthy finances again.
But what if none of the above options is going to be enough to help you? Well, read on, because there are also some external sources of help available.
What outside help is available?
If you are overwhelmed by your debts, then there are professionals who are able to help. A good starting point is to check with the Money Advice Service which is a free and impartial money advice service set up by the government and can point you to other sources of help.
There are various other options that you can choose to take. These include:
- Debt management plan: if either you can only afford to pay creditors a small amount each month or currently have debt problems but will be able to make repayments in a few months, then a debt management plan can be agreed between you and your main creditors to pay all of your debts. You can either arrange a plan with your creditors directly or use a licensed debt management company (for a fee).
- Administration Order: if you have had a County Court Judgment (CCJ) or a High Court judgment (HCJ) against you for debts under £5,000 you can make one payment a month to your local court and the court will then divide this money between your creditors.
- Individual Voluntary Arrangement (IVA): an agreement with your creditors to pay all or part of your debts via an insolvency practitioner, who will then divide money between your creditors.
- Debt Relief Order or Bankruptcy Order: if you cannot pay your debts because you do not have enough money or assets you can sell.
How to stay out of debt
Whatever route you take to get your debts paid off, you can do it!
But once you have done this, it is even more important to stay out of debt. A good analogy is losing weight. If you have ever lost a noticeable amount of weight this takes a lot of effort but you feel and look great afterwards. But if you are not careful , you gradually slip back into bad habits and the weight starts piling back on again.
So to ensure that you stay out of debt long term, you need to keep up all the above habits. Staying out of debt is a lifestyle change, and a discipline, but one that will make you happier and more stress free. You can begin to build up savings again and make exciting plans for the future, without the weight of debt on your shoulders.
Check back here soon for more financial and lifestyle advice from Loans 2 Go.