We all suffer with debts. Many debts are a form of control, and the sooner you are clear of your debts, the sooner you will be free.
Debts can turn into an endless negative cycle.
You struggle one month, so you take out debt to get by. That debt costs next month, so you struggle even more.
The Money Mage household has cleared over £160,000 of Debt over 5 years.
You can too.
These Five Easy Steps to Debt Freedom can help you be debt-free too!
This is the first post in the Money Mage Debt Series. Money Mage is personal thought and opinion on a personal blog, provided for information and entertainment only. Money Mage should not be construed as advice. Please read the Disclaimer. Debt is a serious problem, and if you are struggling, Seek Help.
Step 1: How to stop the Debt Cycle?
Many Debts are a cycle.
Especially ‘bad’ debts like:
- Credit Cards.
- PCP Car Finance
- Payday loans.
- Guarantor loans.
- High APR personal loans.
- Rent-to-own retail.
These debts turn into a negative cycle. You are paying more — often twice as much — for the goods or service. This keeps you locked into a debt spiral. You borrow more, repayments stack up, and your finances suffer further next month.
Your first step is to stop. Stop as many of these kinds of debt as possible. Now.
Some you can’t cancel, and you’ll have to repay. Others you won’t be able to cancel as you need the goods or service. But as many as possible cancel today and aim to never use again.
Stop Immediate Debts
If you can, stop, return, cancel or arrange repayment plans for these debts:
- Credit cards.
- Future holidays on finance.
- PCP Car Finance. If you are struggling to pay, look to Voluntary Terminate. Unless the market value of the vehicle is worth buying & selling on second-hand.
- Cancel or get out of any rent-to-own or catalogue items if you are able.
- Cancel high-cost mobile phone contracts.
- Cancel high-cost broadband and TV contracts.
Cut up your Cards
If you are making interest payments upon any of your credit cards or if you are only making the minimum payment. Cut up your credit cards now. Phone up and cancel your cards so you can’t add more to the debt.
Do not put another penny on credit cards.
Stop Debt Habits
Shortly, you will cold-turkey your debt habits.
- If you borrow money from friends, family, or colleagues. Stop.
- If you use your credit cards to get by. Stop.
- If you use short-term loans or payday loans. Stop.
- If you buy from catalogues or rent-to-own retailers. Stop.
This may sound brutal. But the next steps will work through a plan.
If this idea has you anxious or worse not sleeping: Seek Help.
Step 2: How to budget?
Budgets are bullshit. Seriously. Let me hear you say it: Budgets are bullshit. Again! Budgets are bullshit!
You want to work from actuals. What you are actually spending. And on what.
Measurements over Budgeting
This will be boring. Warning: If you can’t use a spreadsheet, learn a new skill today! Or do it on a piece of paper!
But it’s going to fix your debt crisis.
Here’s what to do. It’s simple.
For the last month do the following:
- Gather your bank statements for the month
- Gather your paychecks for the month
- Create a spreadsheet
- Create a section for ‘Income’
- Under ‘Income’ put your income.
- Summate income into a total income.
- Create a section for ‘Expenditure’
- Under ‘Expenditure’ create buckets for your main spending habits: Rent/Mortgage. Local Taxes (Council tax in the UK). Food. Energy. Entertainment. Eating Out. Clothes. Toiletries. Makeup. Whatever ‘top-level’ categories your spending is under.
- Comb over your bank statements. Assign every line item to a category. If there isn’t a suitable category, make a new one. ‘Cat costumes’ can go under ‘Pets’
- Summate expenditure into total expenditure.
You now have a basic Income & Expenditure sheet. At this point, your Income should be greater than your Expenditure. Create a row that subtracts your Expenditure from your Income. If you are struggling with Debt, your Expenditure might be greater than your Income. That’s OK. You can fix that.
You need to get every last expense. Every. Last. Expense.
- Bills: Council Tax, Rent.
- Credit Card Bills.
- Gas & Electric
- Mobile Phones
- Subscriptions like Spotify, Netflix
- Cash withdrawls — what does it go on? Shops? Taxis? Down the pub?
- Eating Out
Think of everything. Go through every line in your bank statement and figure out what it was. Capture it all in the spreadsheet.
For the last month at the very least. If you want to fix your debt crisis, do this for the last 3 to 6 months.
Brutally Cut your Expenses
Next is not going to be fun. But you need to do it.
And you’ll need to keep on doing it. If you are struggling, Seek Help.
You now need to comb through your Expenses. You are going to brutally ask: Do I need this? Really need?
Start with the ‘easy’ things:
- Do I need that TV package?
- Do I need that expensive phone on £40/mo contract?
- Can I pay less for food? Shop elsewhere? Don’t buy brands? Eat healthy for less?
- Can I stop or cut back smoking?
- Can I stop or cut back drinking?
- Can I really afford to go on holiday this year?
- Can I not eat out or get takeaway for a month, or 3 months, or 6 months?
- Can I find cheaper car insurance, house insurance, or energy provider?
- Do I need to pay for a gym membership?
But start to think brutally:
- Is my rent too high because I am renting a place that’s too big? Too nice? Could I move to a cheaper property or area?
- Do I need my car? Can I walk, or bike?
- If I need my car, can I downsize it to a cheap second-hand car?
- Can I cancel the holiday I’ve already booked?
- Can I sell or cancel the new TV I’ve bought on finance?
You want to get your expenses as low as possible. For a few months at least.
Why? So you can build up reserves to never enter the Debt Cycle again.
Step 3: How to avoid Future Debts?
You need to have brutally looked at your expenses in Step 2 before continuing. If you have not done so, go back again.
You need a few quid left every month. Even £20–40 will help. The more leftover, the better.
You will now build up a reserve of readily available cash to mean you can avoid Debt in the future.
Build an Initial Emergency Fund
First, aim to save £500. This £500 will be your initial Emergency Fund
Only use your Emergency Fund for Emergencies, i.e.:
- Your car breaks down
- Your washing machine breaks down
- You lose your job
- You or your partner is off sick
You’ll aim to have an initial Emergency Fund of £500 — and keep it at £500 at all times. If it ever dips below. Top it back up.
That’s about £40–50/mo for a year. Or 5 months if you can stash away £100/mo.
That £500 will let you avoid Debt in the future. Rather than having to borrow from friends, family, or loan companies.
Open a Cash Savings account (Instant Access) with a bank. Start saving as much as you can until you reach £500.
Remember Step 2? You are going to have to stick at it.
Keep your emergency fund at £500! If it dips below. Top it back up.
Step 4: How to Clear your Debts?
You should now be in a position where you:
- Have saved an Emergency Fund of £500
- Have slashed your expenses as low as you can
- Have stopped getting into more Debt
This is an awesome place to be. Congratulations! Treat yourself!
It’s now time to start obliterating your debts.
If you only make the minimum payments, your debts will never go down.
You need to start clearing big chunks of your debt.
Talk to who you owe money to. Is it a company like Energy, Mortgage, Bank Loan, Credit Card or even Payday Loan? If so, the company must provide you with support if you are struggling. They must agree on a repayment plan if you are struggling to repay.
You may be able to negotiate a payment holiday, interest holiday, or lower repayment plan on some of your debts. Speak to those who you owe money to find out.
If you are struggling & talking to those who you owe money to doesn’t work, Seek Help.
Some debts have higher priority than others.
Think about the consequence of non-payment. Non-payment of your rent or mortgage means eviction or repossession. Non-payment of Council Tax can lead to court, wage arrestment, or a criminal record.
Debts that will put you on the street or in court are ‘high priority’. You must pay the minimum on these. Find a way.
All other debts are ‘lower’ priority.
Once you have paid your high priority debts this month, and the minimum on all other debts, focus on reducing your overall debt as quickly as possible:
- Pay the smallest debt off first. Then clear the next smallest debt. This is the ‘Snowball’ method.
- Pay the most expensive debt off first (by interest rate). Then the next. This is the ‘Avalanche method’
If you are the kind of person to give up on something, try the Snowball method.
If you are the kind of person who wants to make the most out of something, try the Avalanche method.
Whatever suits you. Pick one of your Debts. This will be your Target Debt.
You are going to focus on paying off your Target Debt.
Ensure your Emergency Fund is full. Now put any money you were saving for your Emergency Fund towards clearing your debt. And some more. Get that debt paid off. Pay off as much of your Target Debt you can, every month. As quickly as you can.
Go back to Step 2. Sacrifice nice-to-haves and spend any money you can find on clearing your debt. Takeaways, restaurants, holidays. They need to go until your debts are under control.
Once you have cleared one debt, you’ll have more money next month. Then focus on the next debt.
Do you have a large amount of debt? High thousands into tens of thousands? You may want to consider consolidating your debts.
Consolidating means taking out new low-interest debt to pay off your higher-interest debt. You can do this with low-interest debt like remortgaging. Or a low-interest secured personal loan from a bank. If these are unavailable, a Debt Management Plan with a charity like Step Change. Seek Help here.
If you are lucky, you can move some of your debt on to 0% credit cards. If you do this, you need to make sure you have a solid plan to pay off the debt within the 0% period.
Consolidating is a way of reducing your monthly outgoings. This lets you clear your debt faster.
If you have a large amount of debt & can’t work out if consolidating is right for you, Seek Help.
There is no shame in asking for help.
- Are your debts are spiralling?
- Is having to repay keeping you up at night?
- Are you struggling month after month?
Debt Charities like Step Change can help.
Debt Charities can arrange advice, counselling, and talk you through your best options.
Debt Charities like Step Change can arrange Debt Management Plans and repayment options. They can also help arrange insolvency and bankruptcy.
Step Change can help with all aspects of debt, and solutions to debt, including:
- Debt Management Plan — a monthly payment to Step Change, and they deal with your creditors.
- Debt Relief Orders, Individual Voluntary Arrangements and Bankruptcy. Depending on your situation these can pause, reduce or void your debt.
- Equity Release. If you own a property you can release the value of that property by remortgaging.
Which option is best very much depends on your situation.
Reach out to Step Change for help or counselling.
Step 5: How to Make More Money?
You should now have brutally sorted your expenses, saved an initial Emergency Fund, and have your debt spiral fixed.
The fastest way to debt freedom and future wealth is to increase your income. Any extra income goes to clearing your debt.
Promotion or Job Hop
If you are in a salaried job, test the market. Look for a new job in a similar company. This is the fastest and easiest way of increasing your income.
People who job hob every couple of years often earn a 10–20% salary increase. You are often no longer rewarded for staying at the same firm for long periods.
This will depend upon your job, industry, and location.
Job-hopping is not for everyone. Are the internal transfers or promotions that can earn you an increase in salary? Ask your company.
A Second Salaried Job
Lots of people have more than one job. Especially over the weekend or evenings.
This can be a simple way of supplementing your income. Even something simple like being a delivery driver for a local takeaway. It can earn you some extra money.
It’s not for everyone. It’s a lot of extra hours. Could it make the difference between spiralling debts, or clearing them years quicker?
How to make more money Online
This article isn’t going to teach you ‘How to make more money Online’.
There is plenty out there to learn from. But, everyone can make some extra cash online. Use every penny you earn to pay your debts down quicker.
Here are some rough ideas:
- Buy and sell goods on eBay
- Make arts & crafts in your spare time and sell on Etsy.
- Use TopCashback* or Quidco* to earn hundreds every year when you change suppliers. Especially your energy supplier, insurance or internet provider,
- Use TopCashback* or Quidco* on your usual spending. But don’t spend more than you need.
- Make use of Bank referral and Switching offers
- Carry out surveys online, with sites like PanelOpinion.
- Use get-paid-to-signup sites like 20 Cogs* — Sign up with a different email address.
- Sell your time online. Can you write? Can you design? Freelance. This is like taking a second job!
You can make £1k/year tax-free under the Trading Allowance
How to make more money with a Sweaty Startup
Rather than take a second job, why not start a ‘Sweaty Startup’. These are service businesses that do not need skills or training. And importantly do not need a huge outlay to get going.
You’d work for yourself, becoming self-employed. You could do it just in the evenings and weekends. The first £1K is tax-free under the Trading Allowance.
Business ideas like:
- Lawn care
- Garden care
- Cleaning or Maid services
- Pressure washing/cleaning
- Deck fixing & staining
- Residential painting and decorating
- Gutter cleaning
- Car washing/valet
- Dog walking
- Delivering firewood
- Manage holiday lets / AirBnBs
- Oven cleaning
- Residential Laundry
- Seasonal: holiday decorating
You can take this further if you have skills, like plumbing, electrics, joinery, networking & AV, computing and IT.
These aren’t ‘cool’. It’ll be a lot of hard work. But if you:
- Dress well
- Are professional
- Turn up on time
- Provide quick quotes
- Do a good, timely job
- Setup a cheap website
- Pick a service that is under-represented in your area
- Build an initial client-base
- Get and encourage word-of-mouth recommendations, by offering discounts
…you’ll be able to get going and earn some extra money!
The idea with Step 5 is to increase your income.
You then use that extra income to increase the size of your Emergency Fund to 3 to 6 months of your net expenses.
Once your emergency fund is at 3 to 6 months, every penny goes towards clearing your debts faster.
These five steps will help clear your debt. But, are also rooted in the Principles of Financial Independence. This means once your Debts are under control if you stick to these steps you’ll be set for life.
Money Mage is personal thought and opinion on a personal blog, provided for information and entertainment only. Money Mage should not be construed as advice. Please read the Disclaimer. Debt is a serious problem, and if you are struggling, Seek Help.
Other Related Articles
The following Articles from the Best Of Money Mage can help you with your spending, saving and money making.
- Cheap holidays without breaking the bank
- How to lose weight and save money at the same time
- Make Money When Spending
- How to save money when driving
- Big Black Friday SALE
- 8 reasons Financial Independence is for Everyone
- What is an Emergency Fund?
Sources and Attribution
- Whirlpool © Gordon Wrigley, CC-BY
- Macro Mondays, Measurement © Ralf St, CC-BY
- Money © Petras Gagilas, CC-BY