Half of us have run out of money: what can you do?

Running out of money in January

By 13 January half of us will already have spent our December paycheque. It's hardly surprising: either we were paid before Christmas Day itself, and saw a major chunk of the cash eaten up by the cost of the festivities; or we were paid after Christmas, and a large chunk of the cash was eaten up immediately by paying Christmas debts. The risk is that in order to get to the end of January we borrow again to see us through, and end up with exactly the same headache in February. So what can you do?

See also: Festive spirit fuels consumer spending spree in run-up to Christmas

See also: TUC issues warning to Government after sharp rise in household debts

See also: How to avoid bad debts, and the borrowing alternatives available

The research, by PR company Ready10 found that part of the problem is that employers bring payday forwards in December - in fact 55% of them pay early, and 23% of people are paid on the last working day before Christmas.

A third of people say they spent their pay packet within 15 days - which means by the end of last week they were out of cash. Unfortunately, pay day is still a long way off. In fact one in five have to wait 35 days or more between pay days at this time of year.

The company has decided to step in for its employees, and make an extra payment on 13 January. Employees can opt to get 50% of their January salary on the 13th, which they can then manage carefully, so they have as much as possible left over by the time they get to January's usual pay day.

For the rest of us, we need a three step solution.

1. Cut expenses to the bone
Author and personal finance writer Michelle McGagh has just spent a year without spending anything beyond the mortgage, utilities, life insurance, charity donations, broadband, mobile phone and basic toiletries. She also shared a £35 budget for weekly shopping with her husband, and she managed just fine (she's written a book about how she did it too). If she can do a year, then we can all manage a fortnight, so we may need to find less than £100 to make ends meet.

2. Deal with the immediate cash flow problem
If you have absolutely nothing left, then you need to think of the most cost-effective way of borrowing £100 - rather than relying on expensive overdrafts or credit cards. Ideally you can get a 0% credit card to tide you over for the month, or ask a family member to lend the cash to you (although you need to be really clear on terms). You can also consider switching to a bank account with a free overdraft buffer - like First Direct which lets you have £250 free of charge. That way you won't end up adding to your debt problems with punishing interest charges.

3. Plan your February
If you're going to avoid this coming up month after month, you need a strict budget for February - possibly another no spend fortnight - and a route map for how you will get to the end of the month without borrowing money again. Then you need to stick to it.

All of this is easier said than done, but if you can stick to the plan, you'll clear your debts and head into 2017 with a clean slate. If you don't get on top of this now, however, you could find yourself still struggling with last Christmas's debts as next Christmas approaches.

Most common causes of debt
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Most common causes of debt

There are some very common reasons for building up problem debts. Here we reveal seven of the most common, and what you can do if you face them.

Unemployment or illness that means one or more of the household’s earners are unable to work will bring a profound change in family finances, and according to the Money Advice Service is the most common reason for getting into problem debt.

If your circumstances change, therefore, you need to immediately address your family finances, and put everything on a minimum spend lockdown. You should also look into the benefits and tax credits that are available sooner rather than later, to try to close the gap.

If you are on the kind of contract that means varying hours, it can be incredibly difficult to work out what you can afford to spend - making it the second most common reason for getting into debt - according to the Debt Support Trust.

Rather than swinging through the extremes from week to week, the best approach is to establish a budget that will work in the leanest of months, so you don't find yourself getting used to the months when you work more hours.

According to Citizens Advice, trying to service too much debt is the third most common reason for getting into difficulties. The TUC found that those with problem debts spend 40% of their income on debt repayments.

If you are in this position, you officially need some help with your debt problems. If you continue to rob Peter to pay Paul, you will end up owing more and more, so you need to take stock and talk to a debt charity about all your options.

The double-whammy of the legal bills combined with the incredible cost of establishing two separate households is enough to make divorce or separation the fourth most common reason for going into debt - according to the Debt Support Trust.

There's no easy solution, but if you are going through this, it can be helpful to talk through your financial situation with someone you trust or a debt charity, who can help you balance a stretched budget.

Problem debts aren’t necessarily caused by a sudden shock to the system. According to the Money Advice Service, 20% of their clients are simply trying to live on an unsustainably low income.

If you are in this category, it’s important to seek help on the benefits and tax credits you may be able to receive. It’s not always easy to navigate the system, but charities like StepChange have experts on the benefits system who can talk you through what’s available.

The combination of rising costs and stagnating wages over the last few years has meant increasingly people saw their monthly wage cover less and less of their monthly outgoings. This position has started to ease more recently, but has left many people far worse off than before the financial crisis. The Money Advice Trust said a combination of this and unexpected costs was responsible for almost one in ten problem debts.

If you consistently spend more than you are expecting, it's well worth keeping a spending diary. That way you can establish the real cost of living, and start to identify where you can cut costs.

The Money Advice Service says it commonly deals with individuals who have struggled to get to grips with budgeting and debts, and have got into debt because they don’t have the skills and knowledge to manage their money effectively.


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