2. Create a budget
You need to work out how much you can afford to pay towards your debts. The simplest way to do this is with a mini-budget – decipher your money in from your money out:
MONEY IN: Salary, pension, benefits, etc.
MONEY OUT: Food, rent, mortgage, BNPL, credit cards, electricity, gas, phone, transport, etc.
From here, work out your net position. This is the total money in minus the total money out. This will raise questions: is there more money going out than coming in? Are your outgoing expenses more than you expected? This is where the tough choices begin, but it is also the start of your debt-taming.
Ask yourself what can and can’t I do without?
The best way to categorise this question is to separate the ‘needs’ from the ‘wants’. Needs are musts while wants are desires but something you can ultimately go without.
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Be realistic – if you are too hard on yourself you won’t be able to stick to your savings plan. The savings you can make from your spending will add up and this money can then go towards your debt. This is your debt savings.
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3. Decide on your debt priorities
Now you have your debt savings you need to prioritise where it goes. A rule of thumb is to tailor it to your own priorities:
HOUSING PAYMENTS: Rent, mortgage, etc.
ESSENTIALS: Electricity, gas, water, phone, etc.
PERSONAL DEBT: Credit cards, personal loans, car repayments, etc. If you’re having problems with a big bill, contact the provider to get an extension or set up installments. Look to automate the repayments so you don’t forget to pay on time.
4. ‘Snowball’ to debt free
The fastest way out of debt is by ‘snowballing’. You’ll want to start small and pay off debts one by one, particularly credit cards, BNPL, and personal loans.
Work from smallest to largest. Pay off the minimum monthly amount on all other debts, and whatever is left of your debt savings goes to the smallest debt until it’s cleared. Then move to the next and so forth. Before you know it, all debts will be clear leaving just the important repayments like house and essentials bills.
Make sure to celebrate each time you clear a debt. Reward yourself with something you enjoy. It will reinforce your actions and keep you on track.
If you’re in a debt crisis and struggling, there are places that can assist with things like housing, food, bills, and emotional support. The place to start is the National Debt Helpline – 1800 007 007.Your Debt