We’re a nation built on credit, but we don’t have to be. We’re creatures of habit, and it’s become normal for us to get credit cards and use them. I’d like to see that change.
In the US, the third Thursday every October is Get Smart About Credit Day, and we should piggyback on that here. It could be called Get Smart About Debt Day, because that’s exactly what credit is, it’s not our credit, it’s our DEBT!
Whatever you want to call it, use the day to begin the process of climbing out of debt with my simple tips.
The first thing you must do is to take your head out of the sand. Yes, it’s tough, it can be unpleasant if you’re not really sure of your situation right now – but facing up to things is the only way to start.
Step 2 of my book The Money Plan is to get financially well organised, so it’s time to make a spreadsheet. Call your credit card providers or go online, and get the information you need: the balance, minimum monthly payment and the interest rate of each credit card or debt you have. If it’s a loan, you also need to know the term (duration) of the loan. If you struggle with this, go to my site and download my free Debt Organisation Template.
Next, try to get the best interest rate you can with each provider. Call them and see if they can reduce the rate you’re paying, especially if you can get a better rate elsewhere, tell them as see what they say?
Consolidation is no consolation
I’m not a fan of debt consolidation, which is loading all your debts onto one credit card or loan, even if it’s an interest-free arrangement. We’re emotional beings, and whether you’re five years old or 65 years old, we like to get a pat on the back.
As adults, unless you’ve got a great boss, we rarely get one, so we have to give ourselves those wins.
By keeping your debts separate, when you pay each one of them off, you get a win; a ‘Yes, I did it!’ If you consolidate your debts, that win comes so much further down the line. Psychologically, that’s much harder for your journey to debt-free.
That’s why I believe it’s better to keep your credit cards and loans separate. Mindset plays a huge part in getting out of debt, and those wins are crucial.
Snowball your way out of debt
Once you’ve got a spreadsheet detailing all your debts, arrange them into order from smallest balance first to largest balance last – NOT in order of interest rate. For each account, pay off the minimum amount every month, to make sure you’re protecting your credit rating and not getting any extra fees added.
To attack your debt, you pay your snowball – the surplus money you have left over each month – onto the smallest balance first. The idea is to rapidly and aggressively do whatever it takes to pay that smallest debt off, to get a win and feel good about the process and your progress. You’ll be so much more motivated to clear off your next debt this way.
Once that first debt is gone you take your snowball, plus the minimum payment you were paying on the first debt, and pay it all towards your second-smallest debt. Repeat this process over and over until they’re all gone.
My Snowball spreadsheet on my site warrenshute.com is set up to help you do this automatically.
You have two choices to pay down your debt as quickly as possible: bring more money in, or cut down on what’s going out. Unfortunately, there’s no magic spell! Some ideas to increase your income include:
- If you’re on a modest income or have children, use the website entitledto.co.uk to see if you are entitled to any benefits.
- When it comes to your job, if you’re not on a fixed pay scale then there may be ways to increase your earnings; can you do any overtime? Can you add more value to your company, increasing its turnover and with it your salary? Can you ask your boss outright what would need to happen in order for you to get a raise?
- Alternatively, look outside your usual role, for example by freelancing or selling your skills online. Technology has made it possible for anyone to earn money from home and compete with much bigger businesses.
- Sell unwanted items. This is the best time of year for you to clear out all the things in your house you haven’t used for 12 months, as Christmas bargain hunting begins! Thanks to sites such as eBay and Facebook, it’s never been easier to make money from unwanted items.
I have a Bank Accounts System that works brilliantly for any level of finances. It automates your money as much as possible, taking emotion out of everyday financial decisions and giving you control over your spending.
Here’s how it works:
- Set up two bank accounts, one for bills and another for personal spending.
- Automate ALL your regular payments using standing orders and direct debits and have these come out of your bills account – which is also where you have your income paid. Go through each payment and ask yourself three things: do I need this, do I want this, can I get a similar experience for less elsewhere? You might be surprised at how much you can save, from TV packages to utilities to refilling water bottles and having coffee at home instead of out. My expenditure spreadsheet at warrenshute.com gives you ideas for all your expenditure items.
- Put some WAM into your life! WAM is your weekly WalkAbout Money, and it pays for all your variable spending and fun: wine, coffee, haircuts car fuel and so on. Work out how much you want (or have) to spend in a month after your outgoings, divide it by four, and you’ll get your weekly WAM.
- Set up a weekly payment for this amount from your bills account to your WAM spending account. Set it for a Wednesday, because then you don’t have too long to wait after the weekend, which is when most of us spend our cash, until you will be paid again – it’s all in the psychology and it’s automated!
- Your WAM is your weekly allowance; it’s finite. DON’T dip into your bills account for more if it runs out, it’s not too long to wait for the next Wednesday to come around!
This system gives you boundaries that stop you overstretching: if you can’t afford something, save a little of your WAM each week until you can. The bank accounts system works for everyone from those on low income through to very high-net worth individuals, and it will work for you too.
Warren Shute is the author of bestselling personal finance book The Money Plan, available on Amazon, and was named the UK’s Financial Professional of the Year.