If one of your new years resolutions is to pay off your debts, or make noticeable progress towards paying them off, then here are some top tips to help you work towards your goal…
Build out your budget
First and foremost, it’s helpful to know how much money you’ll have to put towards your debts each month. Building out a budget is a pretty fool proof way to work this out.
If you’re in a debt management solution with us, your advisor will run through this with you when you first join us, and then annually for the duration of your solution.
You’ll need to write down your monthly income, and then list all of your outgoings and expenses, and divide them into categories, for example, essentials such as rent/mortgage, bills, groceries, transport, etc., nice-to-have’s for example, tv subscriptions or gym memberships, gifts (birthdays, Christmas etc.), and luxuries such as holidays or beauty treatments.
Add up the total, and subtract this from your income amount to work out the amount of disposable income you have each month.
If there’s not much wiggle room, take a closer look into each of the different categories you’ve listed, and see if there’s anywhere you can reduce this amount to free up some extra income. For example, can you rotate your Netflix and Disney+ subscriptions every month, so you’re only paying for one a month? Can you be more savvy with your shopping, whether it be for groceries or holidays – shop around to find the best deals.
A year in review
One way to find areas you could cut spending on is to do a year in review: take a look back at the past year, and review where your money went.
Keep an eye out and highlight areas where you feel you may not have got your money’s worth – for example, were you subscribed to Amazon Prime, but only used it twice in the past year? Consider cancelling that subscription for the year ahead.
Did you splurge on a new outfit for each special occasion, only to end up wearing each outfit once? Check your wardrobe and experiment with the outfits you already own – mix and match items to create new styles. Clothes are designed to be worn!
Prioritise your debts
If you’re serious about paying off your debts, then this is a goal that needs to be at the top of your priority list.
Now you’ve build out your budget and know how much money you have left at the end of each month after all your expenses have been accounted for, you know how much you have to put towards paying off your debts.
Can you make more than the minimum payment? If you’re in a position where you’re able to pay more than the minimum amount owed on your debts, you’ll be able to pay them off faster, and therefore reduce the amount of interest you pay on them.
Work out a manageable solution
Consider the different methods to pay off your debt.
There’s the snowball method – this is where you pay off your smallest debts first (whilst still making the minimum payment amount on all your debts to avoid further interest and charges being added), and work your way up to your largest debts. In effect, you start small and gradually get bigger, just like a snowball.
On the flip side, there’s the avalanche method, and, just like an avalanche, this is where you start big and finish small. This method focuses on paying off debts with the highest interest rates first, while continuing to pay the minimum amount on all of your debts. This theory behind this method is that you’ll pay less interest overall, across all of your debts.
There are positives and drawbacks to both methods, so it’s important to do further research to find out more before deciding if one of these options is right for you.
You might like to read our article on The snowball or avalanche method: which is better to get out of debt?
Get money advice
As well as methods like those listed above, if you need a little extra help to manage your debts, there are also professional debt solutions available.