Arguably the best debt-management tip of all is to avoid all debt unless it is used for the purchase of an asset, be that a tangible one, such as a house, or an intangible one, such as an education. If, however, you already have debt, then you can save yourself money (and potentially stress) by paying it back as quickly and effectively as possible. Here are 5 tips for doing so.
Make sure you know where your money is going right now
Don’t just rely on bank- and/or credit-card statements to keep track of where your money is going. Headline figures can be very misleading. For example, it can be only too easy to convince yourself that your supermarket shop is all “essential groceries”, whereas a look at your receipt would make it clear that it also included a number of non-essentials. Dealing with debt involves prioritising your spending and in order to do that, you need to have a clear view of what money you have and where it is really going.
Build up a cash cushion before you start paying down debts
This may seem counter-intuitive given that it is highly unlikely that you will earn more interest on cash savings than you pay to creditors. The point of the cash cushion, however, is to help you avoid needing to take out further credit or risk being turned down for it when you have an essential payment to make and no money with which to pay it.
Make sure you have proper insurance cover
Self-insuring can be a reasonable strategy for some people, but, in short, the less able you are to meet extraordinary expenses, the more important it becomes to have insurance to deal with them. If you think you can’t afford it then have a good, hard look at your current spending and see if there is anywhere you can make savings. For example, one bottle of wine each week may seem like a reasonable little treat, but the cost of that weekly bottle of wine might be enough to pay for pet insurance, so which is more important to you?
Pick off low-hanging fruit first
If you have any debts which you know you could pay off relatively easily then it may be worth starting with them instead of with the most expensive debts. There are a few reasons for this. Firstly, it will give you the feeling of a “win”. Secondly, it will allow you to close off the credit line thus not only stopping you from running it up further but also lowering your available credit, which can have a beneficial effect on your credit score and may be helpful if you decide to try to refinance later. Thirdly, by closing your account with the company, you bring forward the point at which they will legally be able to delete your details, which can help to protect against identity theft.
Prioritise your most expensive debts
Once you have cleared off any quick wins, tackle the rest of your debts in the order of how much they are costing you. If you have any cash balances on your credit cards, aim to get rid of these as quickly as possible not only because they are typically more expensive than purchase balances but because they look bad on your credit record. One way you can achieve this more quickly is to use the credit card in question for essential purchases you would otherwise have bought on your debit card. Then increase your payment by the amount you had budgeted to make these purchases. By law, credit card providers must apply any payments made to the most expensive part of your balance first, so they will reduce your cash balance and increase your purchase balance. While this may seem like “swings and roundabouts”, it is, in fact, a net gain for you – as long as you are disciplined about only using your credit card in this way rather than increasing your balance overall.