Budgeting - a solution to your debts?

16 May 2008

If you’re looking for a solution to your debt problems, the most important thing is to find the right solution. Some debt solutions are suitable for big debts; others for small debts. (And ‘big’ and ‘small’ mean different things for different people, depending on their overall financial situation.)

It’s always worth talking to a debt adviser about your finances – but if your debts aren’t too serious, the best debt solution may simply be learning to budget more effectively. You might be surprised how quickly you could solve your debt problems if you really put your mind to it.

How much could you save in 6 months?
Have you ever spent 6 months saving – really saving? 6 months isn’t such a long time, but it could be long enough to let you make a serious ‘dent’ in your debts.

So the question is: “How much money do you spend on luxuries – money that could be going towards your debts?”

A) What kind of luxuries do you buy?
It’s not an easy question to answer, so try listing the ‘Top 5 Unnecessary Things’ in your weekly spending. For many people, that list might look like this:

1. Socialising
2. Clothes
3. Eating out / takeaways
4. CDs
5. DVDs

(If that list doesn’t sound right for you, just write your own.)

B) How much do you spend on those luxuries?
Figure out how much you spend on your Top 5 in one week.
Add up the numbers and multiply the answer by 26.
That’s what you could save in 6 months – just by giving up 5 things. If your debts aren’t that serious, this could be enough to clear (or dramatically reduce) them.

C) How much of that money could you save?
If possible, try to spend nothing on any of these luxuries. It’ll take a lot of willpower, but that’s how you’ll make the biggest dent in your debts in the shortest time.

If you don’t think you can cut out on luxuries altogether, try cutting down by 50% – basically, resist every other temptation to spend money on things you don’t need.

(Just make sure you don’t compensate by spending more on other things!)

Tip: The best way to stay motivated is to keep a log of the money you’re saving, so you can see that all those sacrifices are worthwhile.

D) What debts should you clear?
Use the money you save to pay off things like credit / store cards and overdrafts, which you can repay as fast as you like – they don’t come with ‘early repayment charges’, like some loans do.

Remember that debts grow all the time. If you’re paying 19% interest on your credit card, paying an extra £100 today will have the same effect as paying £119 in 12 months’ time!

E) Was it worth it?
After 6 months, take a look at what you’ve achieved. Hopefully, it’ll be enough to encourage you to keep on like this.

Basically, ‘tightening your belt’ is always worthwhile, whether your financial situation is great, OK, or terrible. However, it isn’t always enough. If your debts have reached the point where you can’t even make your minimum monthly payments, you should seek professional debt advice as soon as possible. A debt adviser can tell you about the debt solutions available (like debt consolidation, debt management and IVAs (Individual Voluntary Arrangements)) and help you decide which one might be right for you.

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