Since writing my first post last month on ‘facing up to debt’, my husband and I are still feeling very focused about taking control of our finances.
I have spent this time finding out exactly what debt needs paying off and to whom. I’m afraid it is worse than we first thought. However, we can either start feeling down about this and let the thought of this never ending debt consume us or we can meet it head on. The latter is what we’re going to do.
To lay it out there, I’m listing our debts. It’s really difficult to admit them but I have to start somewhere and things can only improve from here on.
- Overdraft from old bank account – £80.43
- Credit card no. 1 – £179
- Credit card no. 2 – £5519.89
- Debt management plan consolidated debt: £35,905.83
A total of £41,604.34, it’s enough to make anyone’s stomach turn I know. We also have a mortgage on top of this, but we’re going to ignore that for now, as our goal is to repay personal debts.
With regard to this mortgage debt, we have something to show for it at least. We’re not in negative equity, just about breaking even. That’s good enough for us at the moment! However, the personal debt is just devastating in that we have nothing to show for it.
It’s worth saying at this stage that we have not been at all frivolous in our spending for two years or more. Luxuries such as clothes and going out have definitely not been at the forefront of our lives.
This has been down to a drastic income drop with both of our salaries and having a child to provide for. Our money has been spent on basically surviving and trying not to get into any more debt.
Even in our situation though, it seems we can make cutbacks. For example, by planning meals in advance, we can shop very carefully for our food and groceries and actually save £50 to £100 per month. And this extra money we are now saving needs to be paid off our debts.
The debt snowball method to tackling debt
The path we will be taking to repay our debts is a snowball approach or debt ladder approach. More about the debt snowball method is explained on Dave Ramsey’s site: debt snowball and Keith Rawlinson’s site: The Financial Page. This idea seems logical to me. The general principle is:
1) Put together a honest monthly budget, listing all your spending and then seeing where you can make cutbacks.
2) Build an emergency fund – we’re going for £500 of which we have nothing so far!
3) This is the hard bit – list all your debts from smallest to highest.
4) Scrape any extra money together to pay off the smallest debt first.
5) Once that smallest debt has been repaid, use the minimum payment on that debt and use it together with any extra money you can make elsewhere to start paying off the next debt on the debt ladder.
6) Carry on doing this to pay off further debts, using every extra penny you have along with original repayment amounts until all debts are paid off.
The point being, that when a debt is paid off, even the smallest one, the fantastic feeling of accomplishing this will be enough to spur you on to keep going.
The reason for building an emergency fund is that when an emergency crops up out of the blue, such as a car repair, there’s money in savings to pay for it (therefore not getting into more debt over it). Keith Rawlinson’s straight-talking website : The Financial Page explains the whole theory really well.
I think it’s going to be really tough just saving for the emergency fund, particularly as money is so tight everywhere else. I’ll post back soon with an update of how it’s going!