Getting into serious debt problems is a gradual process.
You may start off thinking that you are managing OK but, quite quickly, you may find that your debts are becoming unmanageable. In some cases this is due to something happening that you can’t control – you might lose your job and with it your income, for example.
In other cases our debts simply grow because we don’t stop spending and don’t think about how much we owe. We fail to keep an eye on what we spend and how we spend it and, before we know it, making even the minimum payments on a couple of credit cards can be a serious issue.
One of the first things you should do if you are worried about your debts is to work out a budget.
This can, first of all, tell you how serious your problems are and whether you actually need to get some help. It will also show you areas where you can make savings on your spending which could help you get your debt management problems under control without needing a formal debt management solution. So, let’s take a look at what you should be doing here.
- Your income: your first task with a budget is to work out how much money you have coming in on a monthly basis. If you get paid weekly then work out your average monthly salary from your weekly wages. Most of your commitments here will be made monthly so this is the easiest way to assess what is what. Things to include here include:
- Base salary payments.
- Any fixed additional salary payments such as overtime and fixed bonuses and so on.
- Benefit payments.
- Any other regular monthly payments you receive (i.e. Child Benefit, Maintenance Payments).
Don’t include payments or income that you think you might be getting in the future such as irregular bonuses. The figures here should be restricted to money that you KNOW is going to come in, come what may. Next, you should total up all your incomings – this will give you your monthly income figure.
- Your essential/regular outgoings: now you need to look at the things you have to pay for every month such as priority bills and debts and the basic living costs you have to pay for each month. This should include:
- Mortgage or rent payments.
- Council Tax.
- Utility bills.
- Car loan payments (if your car is essential to you because you need it for work, for example).
- Living costs (i.e. food, clothing and essential travel costs).
- Social costs (i.e. the money you spend on having fun!).
At this stage we aren’t going to look at the cost of your debts – this will be handled in the next step. So, now you need to total up your outgoings to get your monthly essential/regular spending figure.
- Your debt commitments: your next job is to work out how much you need to spend every month to service your debts (but not your mortgage which was covered earlier). Things to include here are:
- Monthly loan payments.
- Credit card costs (i.e. the minimum amount you have to spend to service credit card or store card accounts).
- Hire purchase agreements.
- Catalogue shopping costs.
- Existing debt repayment plans
Totalling up these sums will show you exactly what you need to commit to every month to keep your debts in order. Make these payments on time every month and you will keep on the financial straight and narrow.
You are now in a position to assess exactly where you stand. You could have various results here depending on your income, commitments and overall debt totals. So, firstly, subtract your outgoings figure from your income. This will tell you what you have left over for debt management payment purposes.
So, for example, if you have a total income of £2,500 every month and your essential costs total £1,700 then you will have £800 left over. You then need to see how that matches up with the money you need to keep your debts in order. There are various scenarios you could come up with here. Using this example, you could:
- Be coping OK – if your debt commitments total £600 a month then you will have £200 spare. You could use this to increase your debt repayments, to build up emergency savings or simply to spend.
- Be treading a fine line – if your debt commitments total £780 a month then you are treading a fine line between keeping your head above water and not being able to keep afloat. A simple emergency bill or cost could tip you over the edge one month and could see you unable to pay your debts or in the position of having to borrow more to cope. You can make things easier by cutting down on unnecessary spending or by getting some advice on how to better manage your debts.
- Be sinking – if your debt commitments total £1,000 then you need to face the fact that you are in trouble. You need an extra £200 a month just to stay afloat. You may be able to cut your spending costs to do this (your budget will tell you where you are spending unnecessarily) or you may need to get help. If you are running with a deficit figure then the chances are it’s help that you need.
One of the best things that a budget like this can tell you is where you are wasting money. We all get into the habit of spending too much without thinking about what we buy out of habit and you may well find that some simple cost-cutting measures could save you enough money to make it easier for you to cope or to make your debt repayment happen more quickly over all.
It is important, therefore, to look at your social spending in detail to assess where your money goes. There are various ways that you can save money here depending on what you typically spend it on. Let’s look at a few examples:
- If you get a takeaway for the family that costs £15 once a week then you could save £60 a month.
- If you eat out once a week and spend £25 then you could save £100 a month.
- If you buy a coffee and a croissant on the way to work every day at a cost of £2.50 then you could save yourself £50 a month.
Unless you are already really cost conscious there will be things that you can do to curb your spending. Doing this could either make it easier for you to manage your debt repayments or it could give you more cash to spend on sorting them out which could decrease the time it will take you to pay them back. The examples shown above alone could save £210 a month in total which is not a sum to be sniffed at.
If, however, you really can’t see a way to save more money and you simply cannot afford your loan repayment commitments then it is time to get help. Try talking to a debt counsellor to try and find a solution that will suit you. Your budget will still come in useful as it will show your counsellor where you stand and where you could use some help.