Recent shock figures from the Aviva Family Finances Report show that the average British household debt now stands at £13,520 (not including mortgage debt). This is a massive jump since before the 2008 financial crisis.
So, debt crisis for has reached critical levels for many of us. If this is you, you will probably be desperate to get back on an even keel. But the road to debt recovery can feel like a long and arduous one to navigate, with bumps and hurdles to overcome along the way.
Do you need help getting out of debt? Help is at hand. If you have a solid plan in place for every step, then you will overcome your debt woes and ensure your financial future looks bright.
5 Step Plan to Getting Out of Debt
If you haven’t yet considered how to embark upon the path to clearing your debts, then follow our 5 Step Plan to getting out of debt.
1. Take Control of your Finances
The first step in getting out of debt is to look at your finances and work out what you have going in and out of your accounts each month.
It’s important you understand exactly how your money is being spent. Creating a spreadsheet, either online or with a pen and paper, will help you to re-evaluate some of your purchases and direct debits.
If you don’t know what money you have coming in and going out down to the last penny – it will be impossible to start your debt recovery plan.
From this spreadsheet, you can then create a budget to work from every month. Set strict amounts on how much can be spent on a food shop or entertainment for the month and stick to it. For more help creating a budget – check out our guide on how to budget and save.
2. Get Help
Getting out of debt can be very difficult and stressful, so it’s important to get help. If you’re struggling to manage your finances and are in debt, it’s now time to look at what help is available.
For smaller debts, a Debt Management Plan (DMP) may be the best option, whereas those with debts of £7,000 or more that are struggling to make repayments may or more who are struggling to make repayments may benefit from an Individual Voluntary Arrangement (IVA). A free debt advisor will assess your circumstances and look at the best option for you.
3. Stay on Top of your Finances
Once your debt solution is set up it is very important that you maintain a clean track record of repayments.
Getting out of debt requires you to keep a close eye on your bank account (a banking app on your phone is a great way to do this), ensure you have direct debits set up to come out automatically and that you always have enough in your account to cover the amounts.
4. Cut your Spending
Once you have debt arrangements in place, you need to start looking at ways to save money. There are many ways to save without having to make drastic cutbacks, such as:
- Switch – go through direct debts and use a comparison site such as uSwitch or Money Supermarket to switch your bills on gas, electricity, car and home insurance etc. By shopping around and switching, you could instantly save up to £200. Make sure you check your contract before trying to switch suppliers though – there may be a notice period or early termination fee.
- Save on food bills –. Try shopping in budget supermarkets such as Aldi and Lidl and make meal plans so you don’t overspend on food. Check out our top tips to save money on food shopping to see how you can save money on food.
- Build an emergency fund – even though you are paying off debt, use any spare cash to start building a small nest egg to help cover future financial emergencies. Check out our guide to building an emergency fund on a tight budget.
Even if you are in severe debt, making small savings in your monthly budget will help you to get back on your feet quicker.
5. Keep it Up
Once your debts are cleared – don’t return to old habits. The first step you can to take charge of your finances is to create a budget. You can adopt the 50-20-30 rule to budgeting which breakdown your expenses into 3 categories:
- Essential needs
- Food and clothing
Let us break down the 50-20-30 budgeting principle so you can better understand how to apply it. Let’s say you have a monthly income of £1,800:
- £900 (50%) should go on household essentials such as your mortgage repayments, utility bills, councils and phone/Internet costs and travel expenses (fuel, train).
- £540 (30%) should go on food and clothing.
- £360 (20%) should go into a savings account. It may be tempting to spend this remaining amount but if you manage to save it, you will have £4,320 at the end of a year. Enough for a reward (such as a holiday) for all your hard work!
Put these steps into place and you’ll race down that road to debt recovery. Good luck!
Over to You
Have you recently wiped out your debt? Or are you currently on the road to recovery? Share your experiences and tips for getting out of debt with us – we’d love to hear from you.
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