For most people in debt it is nearly impossible to reduce their spending habits to bring it inline with their income. They may look at their bank account(s) and think there is no chance of alleviating their debts and have no alternative than bankruptcy or another debt solution. We like to think that a lot of people can be saved from bankruptcy by doing a little research and planning by following our 5 step guide.
1. Work out where your debt came from
• Take time to see what you spent your money on and why you spent that money. Over what time period did you accumulate this debt?
• Identify whether this debt was spent on necessary items or was it spent on lifestyle interests?
• What is your disposable income (your difference between earnings and spending)
Attached is a free tool to help you put your finances down on screen
2. Analyse what your financial report
Now that you have your finances in front of you, try working out what outgoings you can cut back on. Do you really use that gym membership, can your sky/cable package be reduced, can you save money on your mobile phone bill using bill monitor, can you reduce your gas and electricity bills using uswitch ?
Try replacing you outgoing figures with any savings you can make and now see what your disposable income is like. You may want to consider the attached Income/Expenditure guidelines to help you understand where your outgoings should be.
3. Look for ways to create extra income
Now this isn’t world-beating advice but having a few extra quid coming in can massively help your financial situation. This doesn’t necessarily mean going out and getting a second job. You can generate extra income by selling unused items on ebay. They do say that one mans junk is another mans treasure. Another way to generate extra income is to do online surveys. Honest rewards typically pays between £1 and £10 a survey.
You may even have a skill in something such as writing or have a technical understanding that people are willing to pay money for. You can use sites such as Elance to find freelance jobs that will help provide some extra cash.
4 Develop a cash management system
If you do have any disposable income from step 2, you can begin to look at opening up separate bank accounts to help control your spending. As well as your current personal account you should look to have one account for all your bills and grocery shopping, another account for any possible savings and perhaps another for lifestyle expenses. This should help you control your spending by knowing where you are with your money each month. This means on payday, you can allocate money into each of your accounts so that you know that your essential bills and items are taken care of each month and you know exactly how much you have available each month to service your debts.
5 Prioritising debts
The idea here is to start paying off the debt with the lowest balance (not the one with the highest interest) and to pay the maximum you can afford each month to help clear that debt. All the other debts can be maintained on minimum payments until it is their turn to be the priority payment.
Alternatively you can attempt to negotiate with each one of your creditors for them to reduce or freeze the interest on the debts and to accept a reduced payment. By doing this you will look to repay each of the debts evenly and each payment you make will be made to paying off your debts rather than simply covering the interest charges each month. This method is more commonly know as debt management and can be entrusted to be managed by a company or if you are feeling confident, can be managed by yourself.
When you combine the above 5 strategies you should have a better chance of fighting bankruptcy and will hopefully give you an opportunity to clear your personal debts without any outside assistance.