I often compare debt to quicksand – very easy to fall into, but very difficult to get out off. Feeling trapped by your debts is not pleasant, but by implementing a structured approach to cutting your costs and increasing your repayments, you can set yourself on the path to financial freedom.
Fully Understand Your Current Position
Before you can properly begin to create your debt re-payment plan, you need to understand some key facts:
- What is your current income?
- How much do you spend and what do you spend it on?
- How much money do you have in savings (if any)?
- How much debt do you owe and to whom do you owe it?
Get all of this information down onto paper, so that you can assess your current situation. You may surprise yourself and find that you are currently spending more than you earn each month or you may have some savings that are earning a lower rate of interest than that which you are paying on your debts.
Formulate Your Debt-Repayment Strategy
Using this information you can come up with an approach for paying-back your debts. This might involve cashing in savings or stocks and using those to re-pay a large chunk of your debt, or it might involve trading down to a smaller car or selling stuff from around the house on online auctions to generate some extra cash to pay-down your debts.
Another element of the repayment strategy will be to find ways of reducing your spending, so that you have more money left over for debt repayments. There are numerous money saving tips and ideas available, but I prefer to focus on the ‘Big-Hitters’, the four or five money saving ideas that will save you the most money each month.
For more insight into clearing debt, take a look at the Three Step Approach to Clearing Your Debt guide.
Top Five Money Saving Ideas
Here are five ways of saving money that I have found to be very effective:
1 – Reduce Your Shopping Bills
The average family can easily reduce their weekly food bills by £10 or £15 each shopping trip just by changing a few habits:
- Plan you weekly meals and make a list before going to the supermarket – This way you can minimise waste and avoid impulse buys.
- Avoid pre-prepared meals – Cooking your own meals from scratch is not only cheaper but also much healthier.
- Look at own-brand equivalents – Very often the own-brand product provides exactly the same quality, but at a lower price. Try buying everything own-brand and only switch back to the normal brand item, if you are not satisfied with the quality of the own-brand variant.
- Avoid special offers unless they suit your needs – Don’t buy a product that you would not normally use, just because it is on special offer – remember supermarkets use a number of different tricks to try and get us to spend more money with them. Only take advantage of special offers if they are for products in your core use.
2 – Reduce Your Mortgage Repayments
If you are due to re-new your mortgage, shopping around for cheaper options can certainly pay you dividends. Even a 1% reduction on a £100,000 mortgage can make you savings of around £80 per month or £960 per year.
3 – Reduce Your Energy Bills
One of the big energy comparison websites estimates that customers can potentially save £325 a year by switching energy suppliers. The key is to ensure you compare all energy plans before switching and to ensure that the comparison is based on your personal circumstances, such as where you live, the amount of energy you are likely to use and whether you will be paying by direct debit. Click here for a list of gas & electricity comparison websites.
At the same time you can be looking for ways to reduce your energy use around the home, such as:
- Energy-efficient light bulbs
- Loft installation (which is often grant-supported)
- Lowering the central heating thermostat a notch or two
- Switching off the lights and not leaving electrical appliances on standby when not in use
4 – Shop Around for Your Car Insurance
Car insurance companies often tend to treat new customers better than existing customers, so being a loyal customer can mean that you miss out on some of the better deals.
Simply by getting on the phone or going online you could potentially save anywhere up to £200 on your car insurance premium, especially if you have being with the same insurance company for a couple of years.
Other tips for reducing your car insurance premium are:
- Pay up front – insurance providers tend to charge more for the convenience of paying by direct debit each month
- Accept a higher excess – raising the excess figure usually reduces the overall insurance cost, as it puts more risk on the driver
- Reduce the level of perceived risk to your insurance company – insurance companies hate to pay-out money, so if you can show them that you are a lower risk than other drivers then they are more likely to lower your premium. A good solid no-claims bonus, no penalty points, no car modifications, good security and as few named drivers as possible, all help to contribute to lower premiums.
5 – Stop Buying Expensive Lunches
Every day workers around the country shell out £4 or £5 to buy their coffees and sandwiches, but by simply buying all the ingredients from a supermarket and making a packed lunch to bring into work, it is possible to save at least £3 per day, which equates to £15 a week or £720 per year.
Just by adding up the potential savings from each of these money saving ideas, it is easy to see the benefits.
- Reduced Food Shopping Costs – £720
- Mortgage Savings – £960
- Reduced Energy Bills – £325
- Lower Car Insurance – £200
- Reduced Lunch Costs – £720
Total Saving: £2,925
Remember these are just some of the Big Hitters and there are many more ways to save money – take a look at the Money Saving Ideas page for plenty more tips and ideas.