How to Manage Debt
Debt can creep up on anyone, and before you know it you can be overwhelmed by it. You may find your debts start off very small but over time your borrowing increases and the number of people you owe money to also increases. This can be described as a debt spiral. A debt spiral is when you continue to experience increasing levels of debt. You may be asking yourself "how could anyone get themselves into a situation like that?"
Debt spirals happen when your debt becomes increasingly more difficult to handle, and the growing interest on your debt takes most of the money you are putting into paying off your debt – while your overall debt remains unaffected.
This situation may seem hopeless, but there are options available to get yourself out of it.
At JN Bank UK, we have put together this guide on how to manage debt and how to put a stop to the debt spiral you may be facing.
Written by Harvey Perry
JN Bank UK Digital Marketing Executive
Many people are experiencing financial difficulties, but it can sometimes be hard to recognise what financial difficulties look like when you are already experiencing them. It's not only struggling to pay for shopping, or juggling several overdue payments. Here are some examples of what could highlight for you that you are facing or are already experiencing financial difficulties:
- The income you rely on has been reduced and you do not know if it will go back up
- You owe back money you have borrowed to several firms and people
- A recent reduction in your income has now made you unsure if you have enough money to cover your debts or priority bills
- You have had to borrow more money to make the payments on already existing debts
- You or a family member close to you has experienced ill health, and has had a significant impact on your income or has increased your expenses
- You are worried about money and any amount of money you owe to firms and people
Creating a budget may seem hard, but the idea of starting and keeping one gets easier when you are honest about your current situation. This five-step approach to creating a budget will help put you back in control of your finances.
Step 1 - List all your income
Including only your most regular and reliable income, make a note of everything you bring in each month. This could be income from your job, benefit money you receive, or anything you use and rely on as income each month. Do not include income you receive infrequently as your income needs to be a reliable amount you can depend upon not to change.
Step 2 - List all your expenses
First list regular expenses like your rent, mortgage, insurance, and any additional bills you will spend on electricity, water, TV, etc.
Secondly, you will need to work out the average amount you spend on your variable expenses. This could be your personal expenses, medicine, car fuel, takeaways, etc.
Step 3 - Money left over
The money you have left over after all of your bills are paid is a very important number.
Ideally, to start saving money and have money set aside to afford to treat yourself, you will want to maximise this number as much as possible. Understanding how to make this number as large as possible is how you will start to comfortably pay off your debt.
Step 4 - Correcting your expenses
Reducing how much you spend each month is the key to increasing how much money you have left over, and how you can put a stop to your debt spiral.
Although it can be a hard decision, the best place to save money is by looking at your variable expenses and stopping the activities that are nice to have, but not an absolute necessity.
Splitting these expenses into “Wants” and “Needs” is the best way to take a step back and ask yourself if you need all the subscriptions and expenses you have and pay for. In Britain, households spend an average of £2 billion on subscription services each year, including things like Amazon Prime, food delivery services, and even contact lenses!
Step 5 - Remember to keep track
With all these things in place, the final thing to remember is to keep track of all your income and expenses throughout the month. You can keep track of your budget with a classic pen and paper, on your mobile, tablet, or a computer
Remember - the goal is to have as much money left over after your expenses are paid, but you cannot put too much pressure on yourself to achieve it after only a few weeks of careful budgeting. Recovering from debt takes time but it can become manageable and cleared over time.
Using a pen and paper will only get you so far when it comes to tracking your finances and understanding what you need to pay back. There are a great many tools online or apps that you can download to track your budget and finances – as well as find you money saving deals.
Martin Lewis, the Money Savings Expert, has been committed to helping people save all the money they can whilst not cutting back on every aspect of their life. Two of those ways are with Comparison Sites and Debt Consolidation Loans.
Comparison sites will collect data from energy, car insurance, broadband and TV providers, and more, to find you the best deal – all in one place. Some service providers may offer more frequent money-saving deals to new customers over their current and loyal customers, and if you are someone who has been with a provider for several years and never switched, then it is a great time to look around and compare how much money you could save yourself!
You can also save yourself an incredible amount of time having all of the options laid out in front of you. With minimal effort and with only a few searches you can receive hundreds of quotes, options, prices, and comparisons all in one place. There's no need to add more stress to yourself during this time by going from one website to another website, to another website, writing down and comparing prices. Make it easy on yourself.
By having all of the options laid out in front of you, you can easily compare the details of each option - all on one page. Comparison sites will display the details of each product so that you can easily digest them and make an informed choice.
If you are someone with a lot of debts going to many different lenders and you are struggling to keep up with the regular repayments, there is an option called a Debt Consolidation Loan. This will provide you with a loan large enough to pay off your existing debts, leaving only one lender left to owe money back to and hopefully leaving you in a better position to better manage your debt.
Take a moment to consider these 3 things before taking out a Debt Consolidation loan:
- Make sure you can pay at least the minimum repayment amount each month
- Does the loan cover the full amount of all your other debts or credit commitments?
- Will you end up paying more overall with this new loan, because of the monthly repayment's amounts being higher than what you are currently paying?
StepChange, a Debt Charity organisation offer free, flexible debt advice based on a comprehensive assessment of your financial situation, advising people on how to manage debt. StepChange have a Debt Consolidation calculator that will help you work out if a debt consolidation loan will help you, as well as more supportive information.
Finally, cutting back costs and having some savings in your pocket has been a constant worry for many households during the cost-of-living crisis. There are many quick things you can do, that hopefully, you may already be doing, to save money and cut back your monthly expenses so you start to see the money left over each month increase more and more so you can start to save.
- Switch to a budget supermarket (take advantage of loyalty cards, and the reduced section)
- Discounts and coupons are your friends (15% or 20% off here and there will add up and that means more money back in your pocket)
- Turning off appliances at the wall instead of leaving them on standby could save you an average £147 a year
According to Statistica, turning off lights, appliances at the wall, as well as eating out less often were among the top three ways people are trying to save money during the cost-of-living crisis.
At JN Bank UK we understand that there will still be some households that simply cannot deal with the debt they have and need practical actions that will support them. We have mentioned one Debt Advice charity already, StepChange, and they are just one organisation of committed people who will help you understand your finances, and work with you to find the best option for repaying your debts – all completely free.