Be prepared for a fright, then tackle those debts one by one
Budgeting and focusing on high-interest loans are crucial, writes Charlie Weston
Debt disaster: Many of us are struggling with a mountain of debt. PICTURE POSED
Related Articles
Tuesday February 03 2009
MANY of us are in debt up to our eyeballs. Mortgages, credit cards, car loans and overdrafts are just some of the many borrowings that we are forced to make payments on every month.
And some of us are struggling to such an extent with these debt mountains that we have no money for other things, and despair whether we will ever get to grips with our personal finances.
Elsewhere in this supplement, we deal with mortgage arrears, but here are some tips for tackling debt problems. In particular, we are dealing here with unsecured debts, or those debts not backed by assets pledged to ensure repayment.
You have a debt problem
The faster you face up to the fact that you have debt problems, the faster they can be solved.
Debt counsellors say that too often people are in denial about their debts, throwing unopened envelopes containing bills straight into the bin and ignoring phone calls from creditors.
Once you have owned up to the problem, you should then take some time to put together a full list of all the money you owe.
This is vital if you are to have a clear picture of your financial situation, according to the State-supported Money Advice and Budgeting Service (MABS).
It ain't easy, but you need to get out a pen and paper and work out:
- Exactly how much you owe, and to whom;
- How often you need to make repayments;
- How long it will take to pay off each debt;
- And what the interest rates are on the different loans.
Be prepared to be frightened by just how much you owe and how long it will take to pay some of it off.
At this point, it is also well worth your while listing your income on one side of a piece of paper and your outgoings on the other side of the paper, like electricity and grocery costs.
Use the budget planner on the Financial Regulator's website (www.itsyourmoney.ie) to work out your income and spending and see where you might be able to make adjustments. This exercise will tell you how much you are earning, how much you are spending and what you are spending your money on.
You might be surprised what you are wasting your money on.
For example, do you really need mobile phone insurance? Or it is necessary to have payment protection insurance for your loans?
Cast a cold eye over your direct debits. Are you paying for items you do not need?
Pay high cost debts first
The next step is to list your debts starting with the debts with the highest rate of interest (also known as the annual percentage rate or APR).
You will probably find that little piece of plastic in your wallet or purse, better known as a credit card, has the highest APR. Interest on the poisonous plastic can be as high as 18pc.
One way to clear your debts is to engage in what is known as snowballing.
This entails grappling with the worst debt first, or the one with the highest APR.
This is the method advocated by the financial advisers at the Dublin-based Wealth Shop.
The idea is that you pay down as much money as you can on your highest interest rate debt until it is cleared.
All the while you should continue to make the minimum payments on your other debts.
Then tackle the next most expensive debt and so on until they are all cleared.
However, you must ensure that this snowballing plan is budgeted for.
In other words, it is little use spending all you can to clear your highest interest debt if you can't afford to pay the telephone bill.
So draw up a reasonable budget plan that includes affordable loan repayments. You should also contact your lender or lenders and explain your situation, outlining how you have a plan to tackle your debts and point out that their particular debt will be tackled once the dearest one is cleared.
Always keep your lender fully informed about your financial circumstances.
Remember, if you are paying interest of 9pc on a loan, then clearing it is equivalent to earning a return of 9pc on your money. If you have serious debt problems, you can contact the Money Advice and Budgeting Service (MABS).
MABS has at least one office in every county in Ireland where its staff offer free, confidential and independent advice to people with debt problems.
You can get details of the nearest office to you in your local phone book or at the MABS website.
