When you are trying to get out of debt and back in financial shape, the first thing you need to do is evaluate how balanced your budget is. You will need to add up everything you earn, such as:
• Your salary
• Your yearly or quarterly bonuses
• Your job benefits (free health insurance, transport pass refunded…)
• Interest from savings accounts and dividends from investments
• Money from side jobs
• And so on.
The yearly and quarterly figures need to be spread out over 12 months in order to get your average monthly income. Then you will have to do the same for your expenses.
• There are regular monthly expenses (rent, utilities, taxes, subscriptions…) which are always the same amount.
• Other expected monthly expenses like food, petrol, phone bill, etc. can vary a bit from month to month, so you have to input an average figure.
• Then there are some yearly expenses (car and home insurance premiums, membership, school fees…) that need to be averaged out over 12 months.
• Your savings contributions and loan repayments should also be part of it.
• And last, come your random expenses, like holidays, going out, haircuts, clothes… your fun money if you will.
When you add all of the earnings and deduct all of your expenses, do you get a positive figure? If so, well done! You are spending less than you earn. However, if you needed that exercise in the first place, it is likely that your expenses are higher than your earnings. This means it is time to see what you can cut back on.
The first category you should look at is the fun money one. If you are having financial problems, it is the first area to drastically reduce. It is time to tighten the belt until it gets better. You can still find fun activities that won’t break the bank, like hiking, cycling, having a potluck dinner with friends or shopping for clothes at thrift stores.
Then, I would tackle your regular expenses. Are you paying too much in rent? Do you really need an extra bedroom? It is tough to go back to smaller quarters, but paying off debt is an emergency and you will be glad when you become debt free months or years sooner thanks to a few changes in your lifestyle.
Generally, it is advised that you spend a third or less of your take home pay in rent. Another third of your paycheque should go to regular expected expenses, and the last third is to be split between fun money, short term savings (to pay for car repairs or the next holiday) and long term savings (to pay for retirement or a house).If you have debt however, putting money in a 1% savings account while paying 19.99% interest on a credit card makes no sense. All your extra money should go towards your debt, once you have set aside a little emergency cushion in case something happens.
So let’s go back to your living conditions. Can you take a roommate if you don’t want to move out, or ask the landlord for a rent reduction? Next come the utility bills and other regular expenses. It is time to challenge your council tax banding, compare broadband bundles, and check you are on the lowest electric plan possible.
Review every line of your spending and try to either eliminate it, lower it, or justify the value it brings to your life. Your debt repayment journey is going to be long and you don’t want to give up three months in because you tightened the belt a little too hard. Regarding variable spending, such as groceries, you can set an amount per week like £30, then try to make do with £20, then £15, until you really feel the pinch. All that extra money you are freeing up will make your debt shrink so fast it will really be worth the sacrifice.