Tackle your debt – Part 1: Create a plan!
It used to be the case you had to save up for what you needed, simply because you had no choice; credit wasn’t an option. Today, we live in a world where you can usually get what you want and pay for it later. As a result, many people have taken on debt and in some cases, they may have taken on debt that they are no longer financially comfortable with.
If you feel you might be in a situation where your outstanding debt is growing faster than you pay it off, the important first step in regaining control and becoming debt-free is to create a plan. Here’s how to get started.
Understand your situation
A major problem for lots of people that may feel overwhelmed by debt is they don’t actually know how much they owe. So, the most important first step is to add up the total amount of your debt, excluding your mortgage if you have one (you’re already on a repayment schedule with this debt). You’ve probably been focusing on your monthly payments, but it’s time to see the big picture.
Track your spending
Track your money and see what you’re spending each month, then develop a realistic debt repayment budget that takes into account balancing your needs over wants (we discuss this issue in an upcoming topic but needs always trump wants in case you were wondering).The budget should not be what you spend now – that’s what got you here. Cut costs wherever you can. So, if you eat out, do it a little less. If you drive to and from work, take the bus and avail of some great tax-relief via the TaxSaver scheme. If you haven’t changed a utility provider (gas, electricity) in a few years, start shopping for better value today.
Develop a schedule
If you have never before done a trawl through your personal finances, the best thing is do so for 3 months. This will give you incredible insight into how you spend. Next, schedule time at least twice a month to sit down and pay bills, balance your budget and file your important papers. After a few months, you should have a pretty solid idea of your financial situation but the scheduling is key in the early stages of bringing your finances back from the brink. Keeping a budgeting structure and staying organized will go a long way to keep you focused and also lessens the chance you’ll forget a payment that’s due. Bye the way, this is a really good way of ensuring you maintain a good credit rating with the Central Credit Register (CCR) and Irish Credit Bureau (ICB).
If you carry a credit card balance, shop around for better value
If you carry a credit card balance from month-to-month, this is one of the highest loan costs in Ireland, especially if you only make the minimum payment. For example, a credit card balance of €500 can cost almost as much again in compound interest charges if you only make the minimum monthly payment that the credit card company requires. Provided you have a good credit rating, you may be able to get a reduced interest rate for 12 months on credit and balance transfers. A useful website is available from the Competition & Consumer Protection Commission (www.ccpc.ie). Even a small reduction in the rate can save you hundreds of Euro.
Consider the value of a debt consolidation loan
Not all debt consolidation loans are equal so it is really important to shop around. If you have a range of loans; credit card balances, PCP balance due, personal loans then it may be possible to reduce the cost of interest you pay. The trick here is to watch the term of the debt consolidation loan as you do not want to pay more in interest charges if the new loan is stretched over a very long period of time. Many banks and credit unions will advise you on this.
Pay off your high interest debt first
With savings and deposit rates in most places earning little or nothing in interest (and with Deposit Interest Retention Tax or DIRT costing 35% on any interest charges), it really does pay to get rid of the most expensive debt first. So, if you have multiple credit cards, make the monthly minimum payments to all of your other debts and use the rest of your debt payment budget on the high interest debt. Do this every month until you’ve paid off that first (highest interest) debt. Then move on to the debt with the next highest interest rate and repeat the process.
Sell some stuff
With many ways to sell stuff nowadays, you really can turn junk into cash. This can also be a great way to declutter in your home and it really aligns perfectly to the decluttering you are doing with your debts. So, begin the process by taking stock around the house of items you may no longer use of require. Perhaps items of clothing, an old stove, or bikes that you have not used in years that have become dust-gatherers. Remember, in some cases, they might even be contributing to your budget problems with extra expenses such as storage and insurance.
Bring in more money
Before you go down the road of looking at the possibility of a second job, first, why not look to see if you have done all you can to take advantage of the income you may already be earning. For example, have you taken advantage of the available tax-relief options available to you? Here are some that Revenue wants to give you: medical expense relief, home carer relief, rent-a-room relief, bike-to-work relief, tax-saver relief. If you never heard of those, visit www.revenue.ie or www.citizensinformation.ie. Next, ask at work if overtime is an option, if it is, consider taking on some. Or, perhaps there are some second-job options in your area or part-time work if you don’t work currently. Remember, your goal is to get debt under control so this really is just a temporary situation until the debts are manageable…or paid off!
Out-of-control debt can lead to financial stress that is proven to lead to a range of health issues (insomnia, ulcers, depression). But by taking some positive steps and putting a plan of action in motion, it is possible to reduce financial stress, get debts paid off and your life back in control. So, go ahead, take that first step and liberate yourself from debt-stress!
Frank Conway is a financial adviser and founder of MoneyWhizz.org, the financial literacy initiative. He works with schools on a range of financial literacy programmes and also with leading employers in the delivery of financial well-being seminars.