Money Saving Challenge - Money Saving Ideas

How I Paid Off My £6,000 Debt in 14 Months

I’ve managed to run up big debts twice in my life.  The first time was when I left university, which I dutifully repaid and the second time was just a couple of years ago.  I had just bought my first property (near the peak of the housing boom) and then decided that I needed a career break to go off travelling around the world (again probably not the best timing!).

Clearing debt requires you to cut back on your spending, but you need to strike a balance between excessive spending and living on baked beans! 

With all the associated costs of buying and furnishing the property, combined with quite a few months of unpaid leave from work, I got home from my care-free travelling existence and had to face up to the reality of nearly £6,000 of debt that I had accumulated. 

Fortunately, my company had allowed me to take the career break, so I was able to get back to earning an income without any major delay, however living with the millstone of a £6k debt was not something that I wanted to do, especially as the majority was credit card debt, which came with the pleasure of some hefty interest charges.

The approach that I used to clear the debt was broadly in line with the one described in this article I wrote a couple of months ago - Three Step Approach to Clear Your Debt and follows three simple principles:

• Understanding your current situation and knowing where you want to be
• Creating a plan to get there
• Implementing the plan and making regular checks to ensure you are still on track

Creating a Budget to Understand Where I Stood

My first step was to create a budget where I could clearly see my complete financial situation.  This simply meant getting a piece of paper and listing all of my debts, the amount I owed and to whom I owed it.  After that I listed all my savings & investments, my monthly income and a breakdown of monthly outgoings (such as food, mortgage, electricity, council tax etc).

I compiled the lot in an Excel spreadsheet to create a budget – you can download of a copy of the free budget template spreadsheet and just fill in your own figures.

With a complete view of my financial picture I could see some obvious quick wins for clearing my debt and began to formulate my longer-term plan.

Use Savings to Clear Debts

Despite being heavily in debt, I still had money invested in ISAs and shares which I was quite keen to hold onto to.  However the amount of interest that I was earning from these savings and investments was lower than the amount of interest that I was paying on the debt – so in effect it was costing me money to keep them.  By cashing in the shares and ISAs I was immediately able to clear about a third of the debt.

It is surprising how people who are in debt continue to hold onto their savings in some mislead belief that this approach is financially sound, even if they are paying more interest than they are earning.  Better to be absolutely ruthless with your money and take the route that makes the most business sense.

Minimising Expenditure

Using my budget, I was also able to review my spending against what I earned each month.  Fortunately my spending did not exceed my monthly salary, but I was still able to find areas of non-essential saving, such as changing my mobile contract to pay-as-you go, cancelling my LoveFilm.com account and cutting back on my socialising in order to increase the amount of money available to me to repay my debts.

At the same time I didn’t make a complete cut back on everything.  Forcing yourself to live in solitude and eat nothing but beans on toast for months on end is not good for you and it is essential to achieve a sense of balance between excessive spending and die-hard saving.

Creating a Debt Repayment Plan

Using my budget, I knew how much I owed, how much I could sensibly afford to repay each month and therefore how long it would take me to clear my debt.

At the start of the month I would go online to my bank account and make my monthly debt repayment.  This would prevent me from spending the money elsewhere and since paying off my debts I have continued this practice, but now the money goes into an ISA.

If the previous month had been more frugal than normal, I would use the spare cash to top up my repayment figure.

I also stopped using my credit card for day-to-day purposes and just used it where necessary, such as booking a flight online.  To help avoid temptation I placed the card in a drawer (where it still lives) and set a strict rule to immediately pay-off any payments made on the card.

Sticking With It

Initially progress was slow and I often wandered whether I would ever pay-off the debt, but after a few months I could start to see the debt decreasing, which had the added bonus of lower interest charges, giving me more money to make my re-payments with.

I checked my spending against my budget at least twice a month (a habit that still sticks today) to ensure I was keeping within my allowances.

Living Without Debt

To say I am completely debt-free now is not strictly true as I still have my mortgage repayments.  However I am pleased to say that I have no short-term debts or loans and it does feel good.

I still continue the good habits I learned from this experience, but now my spare money goes into savings and helps to grow my wealth, rather than making debt and interest repayments.  I also continue to monitor my budget closely, as I am determined not to fall into the debt trap for a third time!

The Born Survivors Guide on how to Survive in the Financial Jungle

Ray Mears and Bear Grylls have brought outdoor survival skills to the masses with their fascinating television documentaries on techniques for staying alive in the harshest environments and some of those key survival principles that keep Ray and Bear safe, can also be used to help you survive and thrive in the financial jungle.

Rule 1 – Preparation

The best survivors always ensure they are well prepared for any situation before setting out on their journeys.  This means packing plenty of supplies, medical equipment, navigational aids, clothing and consulting with local experts for advice on dangerous conditions, so that they can avoid putting themselves at risk in the first place.

The same can be said for the best financial survivors.  By availing yourself of the right tools (such as a budget), decent financial advisers to guide you and taking the time to research and understand the best ways to save and spend your money, you can significantly reduce the likelihood of running into financial difficulties.

Rule 2 – Ensure you fully understand your problems

Unfortunately, even the best made plans can sometimes go wrong and a change in circumstances could see you plunging into financial disaster. 

When dropped into a survival situation, the first thing that Ray Mears and Bear Grylls do is climb a tall tree or reach higher ground, so that they can survey the situation and work out a plan for escaping.

Often financial problems whirl round & round in our heads and with each revolution they seem to increase in size and appear more and more difficult to deal with.

The best way to begin dealing with your financial problems is to get them written down on to a piece of paper.  Ideally you should try and produce a budget to show how much you earn, how much you spend and how much you owe. 

You can download our free budget template from here.  It is really easy to use and helps you to fully understand your financial situation.

Creating a budget is the financial equivalent to reaching higher ground or climbing a tall tree.  You can now clearly see your complete financial picture and begin looking at ways to resolve the problems.

Rule 3 – Create a simple plan and stick to it

Using your budget to assess your situation might reveal that you are spending more than you earn and by reviewing each of your regular outgoings you can identify areas to cut back on to save money.  If this is the case, then set the plan and check your budget monthly or weekly to ensure that you are sticking to it.

Maybe you have a large credit card debt that you have been unable to clear with the minimum repayments.  Again set a plan to increase the monthly repayments and a deadline for when the debt needs to be repaid.  Monitor your progress monthly and provided you are not still spending on your credit card and continue to make the repayments, the debt should soon reduce.

Some people may be in more serious doo-doo and have such large debts or financial problems that they need professional assistance.  Fortunately, unlike Ray Mears or Bear Grylls stuck out in the desert, help is available, either from a financial adviser or the Citizens Advice Bureau.  Preparing your budget before meeting with your financial advisers will give them a massive head-start in understanding your situation and being able to help you out. 

Rule 4 – Don’t get caught out by the unknown

In the wild, eating the wrong types of berries or drinking bad water can poison and potentially kill you.  A born survivor will only eat and drink what they are confident will help and not hinder them.

In the financial jungle, poisonous dangers lurk in the form credit card balance transfers, payday loans and dubious packages for consolidating your debt into a single payment.  From the outside they look like delicious quick fixes to your money woes, but in reality they could make things much worse.

Very often people are attracted to credit card details by 0% interest deals, but don’t realise that 0% is only on the balance transferred and does not apply to any new credit card expenditure, which could be charged at 20% or above, very likely higher than their previous card.

I’ve seen payday loans advertised on the television with APRs over 1000%, an absolutely shocking figure that will instantly plunge families into greater poverty and have heard stories about people who have lost their homes after securing a consolidated loan against them.

Whilst I appreciate that in certain situations some people have no choice but to use these poison products, they should at least be fully aware of the risks they are taking on and the potential alternative routes that they could take.

This rule relates back to Rule 1 on preparation and getting expert advice.  Even if you are getting a ‘standard’ financial product, like a mortgage or a credit card, you should do your research so that you fully understand what you are getting yourself into.

Rule 5 – Learn how to thrive, not just survive in the financial jungle

For thousands and thousands of years, humans have been surviving in the toughest conditions, such as the Amazon rainforest, the Arctic wastelands and the sandy deserts.  In each of these environments, people have not only survived, but also learned to thrive.

The same should be said for a born survivor in the financial jungle.  Whether there is a tough recession or economic boom, people still need to fight to survive financially, but they can also use those survival skills of analysis, planning, saving and financial knowledge to begin building up their wealth. 

Once you have cleared your debts, consider starting to save and invest in order to build your wealth.  For more advice and tips on thriving in the financial jungle, take a look at this article on wealth creation.

How to Reduce Credit Card Use

Love them or hate them, credit cards are an essential part of modern life.  In fact not having a credit card can make some things very difficult, especially if you are buying online, booking flights or hotels or renting a car.

But because credit cards make borrowing money so ridiculously easy, it is very simple to quickly run up big debts that become more and more difficult to pay-off.  Many of us have been there (myself included) and many are still there, using easy money to fund gadgets, holidays and the latest additions to their wardrobes.

Although my credit card debts never spiralled too badly out of control, I still developed a sort of psychological acceptance of the debt – if I am already £3,000 in debt, then another £200 won’t make much difference – which prevented me from getting too worried about paying the money back and I am sure that people with similar or larger debts just look at the problem and prefer to just live with it rather than doing anything about it.

The Credit Card Debt Blackhole

Banks and credit card companies make a lot of money – in fact they make serious profits and they do this by taking advantage of our desire to spend.

When a person spends money on their credit card, they are charged interest on the amount of money they borrow, often at a rate of 15 to 20 percent, until that money and interest is paid back.

• A credit card debt of £2,000, with a 15% interest rate will incur a charge of £300
• A credit card debt of £20,000 with a 15% interest rate will incur a charge of £3,000

Often people decide to only make the minimum repayment amounts required by their credit card company, however these repayments only cover the interest created by the debt and do little to pay back the original debt.  Potentially people can easily spend the rest of their lives in debt, therefore to all intents and purposes they are slaves to the credit card company!

Say ‘No’ to Credit Card Slavery

The first issue to address is our attitude towards credit cards and borrowing in general. My 91 year old Grandmother loves using her credit card as convenient way to pay for her household bills, such as gas, electricity and water, but at the end of the month she always pays off the balance and is far too proud and thrifty to run up a debt. 

The message is clear - Take advantage of the credit card company, rather than letting them take advantage of you.
When you make purchases on your credit card, you have a set number of days (20 or 30 depending on provider) before you will be charged interest.  Provided you have paid back all the money you borrowed within that timeframe, you will not have been charged interest.

However you will have been able to benefit from the levels of consumer protection on faulty goods or fraudulent transactions that credit card companies provide and have taken advantage of any reward programmes (such as Nectar Points or Airmiles) that the card company offers.

The key point here is that you need to have the money in your bank account to pay back the credit card debt within the interest-free time period.  My Grandmother will not make a purchase that she cannot actually afford to pay back.  When she does need to make a big purchase, she plans and saves up her money first, so that she can afford to make the repayment straightaway.

Other tips for reducing credit card use are:

• Leave your credit card at home – you should only use your credit card for planned purchases, so rather than carrying it in your wallet, why not just leave it at home and avoid the temptation of using it for frivolous purchases?
• Build up an emergency cash fund – open a savings fund, that you can access in emergencies, rather than relying on your credit card for paying a plumber to fix a leak
• Stop trying to keep up with Joneses next door – letting go of the desire to have the latest and greatest takes a huge amount of weight of your shoulders and reduces your need to stretch your cash.

Climbing Out of the Credit Card Debt Blackhole

If you are in the position where you have a huge credit card debt and don’t know where to start, then help is at hand. 

There is plenty of advice on the internet, our Three Step Guide to Clearing Your Debt is a good place to start and you can always contact the Citizens Advice Bureau for some face-to-face support.

The first thing to do is stop spending on your credit card or cards straight away.  Lock them away so that you cannot easily access them. 

Assess how much debt you are in and get this written down on a piece of paper.  Is the debt all on one credit card or is it with a range of credit and store cards?  Which debt is charging you the highest interest payment and can you concentrate your repayments on that card first?

Create a debt repayment plan, with monthly repayment targets.  Can you raise additional funds by selling unwanted goods, trading down to a cheaper car or taking on part-time work.

Identify areas of non-credit card spending to cut back on and use the extra savings to concentrate on your debt repayments.  Visit this page for money saving ideas.

Remember, with the right attitude, help, support and a good plan, it is possible to cut down on your spending and clear your credit card debt.