The level of personal debt in the UK is staggering, and projected to get even higher in the coming years. As of September 2015, total personal debt had reached £1.452 trillion, and the Office for Budget Responsibility projects that by 2021, it will reach a stratospheric £2.551 trillion.
Ask any personal finance expert about the best way to take control of your personal finances, and most of them will advise that if you have any debt, your first priority should be to pay it down and get completely out of debt as soon as possible. Like so much good advice, however, this is much easier said than done.
Stop Digging Yourself Out of a Hole!
You will never get out of debt if you continue adding debts to your financial picture. Look honestly at the debt decisions you have made in the past, and be smart when faced with similar decisions in the future. How many times did you increase your indebtedness for something you wanted, but didn’t really need? Here are a few common debt mistakes that so many of us keep making, even as we sink deeper into debt.
A new car – Oddly enough, many people purchase new cars when the car they have is still perfectly serviceable and economical to operate. They just get the bug to have that shiny new car they keep seeing in the adverts. Even if you have to pay for the occasional repair on your car, it makes poor economic sense to add a monthly payment unless the cost of keeping the old car running exceeds the cost of payments on a new one. Since a car is one of the biggest investments you will likely make, second only to your home, it is essential that you let financial considerations weigh more heavily than emotions on your decision to purchase.
Ongoing expenses – If you find that you are adding debt just to keep up with your monthly expenses, you probably need to make some changes. Find ways to reduce those monthly expenses, even if doing so means cutting back on entertainment and other impulse spending, and finding ways to economise on things like groceries and energy usage.
Set and Adhere to a Realistic Budget
Far too many people fail to even attempt to develop – much less live according to – a personal budget. They go through life playing whack-a-mole with each expense as it pops up, as if every expenditure was a complete surprise. When faced with a genuinely unexpected expense, they are forced to juggle (or even fail to pay) their regular bills, just to cover the “surprise”. For those who have difficulty setting and living according to a budget, the Citizens Advice charity’s online budgeting tool can be a godsend.
Pay The Most Burdensome Debts
While it is theoretically best to pay off your bigger debts first, many people find that paying off numerous smaller debts helps build their incentive to get out of debt. Small victories can encourage taking on the bigger tasks, especially when those bigger debts appear particularly overwhelming.
Use Good Debt / Avoid Bad Debt
Not all debt is bad. In fact, some types of debt can actually be the foundation for your future financial security. It is not difficult to differentiate between good and bad debt, and doing so can go a long way, not just toward keeping your financial head above water, but toward building a financial safety net that lowers your stress and allows you to truly enjoy your life.
Good debts are those that are investments in your future. A student loan to pay for university can help you qualify for a well-paying job or open doors to advancement in your career. Taking out a mortgage to purchase a home can actually be a key step toward amassing wealth for the future, since houses routinely appreciate over time, and a fixed mortgage payment will stay the same, even as rent prices continue to rise. Using low-interest loans or credit card cash transfers to pay down high-interest rate loans or card balances can be useful for managing existing debt and accelerating the payoff of numerous outstanding debts. And taking out a loan for capital with which you build a viable business can increase your net worth far beyond the cost of the loan.
Bad debts are those that don’t add to your wealth or have any potential for paying for themselves. They typically fund lifestyle choices, such as impulse purchases, holidays or other tangible items or experiences for which there is no money in your budget. Debts that carry high interest rates or monthly payments that you will struggle to make are bad debts, even if they are incurred for good purposes. For example, a business loan that severely impacts your monthly cash flow can obliterate the benefits that the newly available cash can provide.
Whether or not 2016 is the year you finally get completely out of debt, it can be the year you get a good start on paying down your debts. It won’t always be easy, but if you set realistic goals for yourself and do everything you can to avoid taking on new debt, you could very well be debt-free sooner than you had ever imagined.