Struggling with debt is a very emotionally draining experience. We know we need to do something about it, but we don’t know where to start.
Taking small steps towards dealing with debt, such as finding the best budget strategies for debt, actually gets us far closer to paying it off. Too often, we stay stuck with the belief that we have to do it all at once, which of course is impossible.
It might be tempting to ignore the debt and hope it goes away, However, if you ignore your creditors for too long, they may pass your debt on to a debt collection agency (like BPO Collections), which will damage your credit score.
In this article, we’re going to look at the best budget strategies to deal with debt, so you can make a manageable plan to get debt-free for good.
What are the best budget strategies for debt?
The best budget strategies for debt are creating different bank accounts for different spends, writing an honest account of how much you owe and your income, finding ways to spend less, and refusing to take out another loan.
Strategies also include increasing your income and selling unwanted possessions, negotiating with creditors, considering debt consolidation, using the debt snowball method to pay off your debt faster, and making your own timeline to pay off your debts.
Let’s dive right in, and look at the best budget strategies for debt.
9 budget strategies to get of debt
Have different bank accounts for your expenses
One of the best ways to budget to get out of debt, is to have different bank accounts for your expenses, so that you can clearly see where your money is going and for what purpose. Often, we have all our direct debits and spends coming out from the same account where we receive our income, and this can become confusing and hard to manage.
The charity Christians Against Poverty (CAP) have a very useful budgeting system called the three accounts system. You have one account for your direct debits – this includes rent payments and debt repayments – one account for your weekly spending, and one account for savings. With your weekly spending account, you take the amount that you’ve budgeted for yourself to spend on essentials like groceries and the occasional treat, and put only that amount in the account every week (the account should be a basic account, with no overdraft facility, so you don’t accidentally overspend). This is a useful way of not going over budget, as once the money is gone, it’s gone! You can even take out the money in cash and put it in different envelopes for different uses (for example, a ‘treat’ envelope or a ‘school budget’ envelope), although this may be more difficult during the Covid-19 lockdown.
Consider debt consolidation
Debt consolidation is a useful way to cut down on how much you’re spending on your debt, as long as you have a good enough credit rating to get a decent deal. Debt consolidation is basically the act of taking out a low interest loan to pay off multiple debts, leaving you with just one, manageable payment which should be cheaper in interest than your previous loans. For example, if you have lots of debt on high-interest credit cards, you could use a 0% interest credit card to pay them off, and then have slightly less to repay per month. However, be very careful with debt consolidation as any interest-free loans you take out many only be interest-free for a fixed period of time, after which interest rates could spike sharply. Make sure that you know you can pay off your debt within the 0% period, or it’s not worth doing. It goes without saying that you should only take out a debt consolidation loan if you can actually get a loan on better terms, otherwise it defeats the purpose. Also, watch out that the low interest loan or credit card doesn’t add charges for balance or money transfers.
Increase your income
As well as spending less, increasing your income is a great way to dash off the debt faster than you could have imagined. Can you pick up some extra hours in a cafe, tutor or freelance on the side? Do it! If you have the capacity for extra work, the sense of achievement you’ll get from pushing yourself to pay off your debt will give you an endorphin rush that will keep the momentum going until you’ve paid it all off. You could also sell unwanted possessions still in good condition on sites like eBay, or sell your old phone back to your phone company or online.
Spend less
Ok, this seems like an obvious one, but you’d be surprised how much you can save on things you may have thought you had no choice in terms of spending. For example, you can use sites like Uswitch.com to compare utilities companies and get a much cheaper deal on your energy and water costs. When it comes to your phone, choose a pay as you go contract, not a monthly one, as it’s almost always cheaper to go for pay as you go. When it comes to the new iPhone Xs, you could save up to £400 if you bought the handset outright, rather than paying it off every month on contract. You can use other hacks, like heading to supermarkets in the evening to pick up heavily reduced food. You don’t even have to hang around by the busy reduced food aisle. Just pick up a basket full of food with dates close to expiry, and ask a member of staff if it qualifies for a reduction. They’ll usually reduce it for you on the spot. Make sure you go through your bank account and check for any subscriptions you’ve forgotten about and no longer use. Cancelling those could free up unexpected amounts of your income to repay debts.
Don’t take out more loans
Refusing to taking out more loans is key to successfully budgeting your way out of debt. If you’re struggling to pay for the essentials, there are many sources of support available beyond taking out a high interest loan. Make sure you your local Citizens Advice Bureau for personalised support, but options for support include:
- Help with paying your rent. If you’re on Housing Benefit or claiming the housing element of Universal Credit, you may be able to get a discretionary housing payment (DHP) from your local council, to help you pay rent.
- Getting your benefits paid early.
- Vouchers from your local council to pay for things like a hot meal, second-hand furniture or household appliances. This is very handy if your fridge suddenly breaks and you don’t have the money to pay for a new one. This is known as ‘welfare assistance’.
- Grants to help with various expenses. The charity Turn2Us has a Grants calculator where you can check what you may be entitled to.
Always contact Citizens Advice, a debt charity or your local council to see what support you can get instead of taking out more credit.
Pay off your debts faster
There’s no rule that says you have to make the minimum repayment on your credit card each month. Making bigger debt repayments will slash your debt faster, getting you to your goal of being debt free sooner. Just be careful, as some banks and credit cards will charge you fees for paying over your allocated repayments or for paying your debt off sooner. However, if there are no extra fees for paying debt off faster, go for it!
Debt is as much a psychological issue as it is a financial one. A good debt repayment tactic is the ‘debt snowball’ method, where you focus on paying off your smallest debt first (while making the minimum repayments on your other debts), in order to get the endorphin hit from paying off a debt sooner. Alternatively, you can use the debt avalanche method, which is to first clear the debt which costs you the most interest, saving you money in the long run.
Know what’s going in and what’s coming out
To budget effectively to get out of debt, you need a really tight knowledge of what is going into your bank account, and even more importantly, what is coming out. You might think that £4.50 monthly Times subscription that you’re paying for because you forgot to cancel your free trial won’t make a difference, but every penny you lose increases the time you stay in debt.
The best way to get a clear sense of how much you owe, and the money you have to pay it off with, is to write it all down. This can be the hardest thing about the debt repayment process, because many of us have spent months or years in denial. But just bite the bullet and do it, because once you put it on paper it stops being the scary monster in your head, and you’ll see it is possible – no matter how overwhelming.- to repay it.
List all your debts in terms of amount, type (credit cards, student loans or hire purchase loans, for example), creditor (who you owe the money to).
Then, list the minimum amount you have to pay on each of your debts per month or week (whenever your repayments are taken).
Add these amounts together, to get the monthly sum of what you have to pay (also make sure you add the total amount of each debt you’re in, so you’re not running away from the final figure). Next, add together your other necessary monthly expenses – mortgage or rent, electricity and phone bills, and groceries. Also total up the amount you usually spend on non-essentials, such as treats or a gym membership.
Put down your monthly salary or benefit payments, and then compare this figure against how much will come out of your bank for your expenses that month, including debt repayments. This should give you a good sense of whether your income is enough to meet your debts, and whether you need to cut back on non-essential spending to make repayments. If you can, don’t forget to put aside a little each month for an emergency fund, to stop yourself from getting into debt again. You might want to put every single spare penny towards your debt, but building savings is vital for staying out of debt long term.
Negotiate lower interest rates
Creditors can often be much more reasonable than we think, and it’s always a good idea to get in touch with them if you are struggling to repay your debt. Legitimate creditors, for example, banks and credit card companies, have policies in place to support you if you’re struggling financially, and would always rather you pay off some of your debt – even if it’s a smaller amount per month – than have to go through the expense of chasing you for it.
Your creditor may agree to lower your interest rates per month, to make your repayments easier. Creditors can do other things, like agree to cancel late fees or allow you to make smaller repayments. Be careful, though, because allowing you to make smaller repayments is likely to increase the amount of time you spend paying off the debt, and you’ll accrue more interest than you would if you paid it off quicker.
Make a timeline, with manageable goals
None of these budget strategies are worth doing, if you don’t have clear goals for paying off your debt. In order to be effective, goals must always be SMART – Specific, Measurable, Achievable, Relevant, and Time-bound.
Too often, we make vague, overwhelming goals out of our own panic and desire to be debt free now, and when we don’t achieve them because they’re impossible, we feel worse.
Look at the overall figure in terms of debt that you have to pay off. Using the knowledge you already have from calculating your income and other necessary expenses, you can work out roughly how much you’d have to pay off each month to be debt free in, say, five years. If you want to be debt free sooner, you can start brainstorming creative ways to cut your spending, to bring the deadline to three years.
You’ve already done the big step of breaking your debt into monthly amounts. To keep yourself focused, create intermittent goals in your timeline, so that it doesn’t just feel like an endless, repetitive slog to get to five or three years debt free. Set targets for every three to six months, too, where you plan to knock off a certain amount of debt. Check in with yourself and see if how much you’ve paid off, and whether you’re on track. When you achieve each target, you’ll get an endorphin rush which encourages you to keep going, and shows you that you can do it.
So, there you have it. The best budget strategies to deal with debt. We hope you’ve found this a useful read. Remember that as soon as you break your debt into manageable repayments and focus on those one at a time, the sooner your debt will decrease.
