Dealing with debt: 8 steps to taking control of your finances

Getting out of debt is manageable if you have a good action plan in place. (Getty Images)
Getting out of debt is manageable if you have a good action plan in place. (Getty Images) (Getty Images/iStockphoto)

There has never been a better time to fix your finances and get debt free.

It’s a worrying time just now – and that puts pressure on our wallets too. Inflation is at a 30-year high, meaning prices are rising very fast and we are just weeks away from a jump in energy bills and taxes.

The news from Ukraine could also mean higher prices on bills and even the cost of food as the conflict sends economic shockwaves across the world.

Now, in a crisis it can be really tempting to just get your head down and wait for it to blow over, rather than start to make big changes in your own life.

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But the financial squeeze is not going away. And that means this is the moment to look honestly at your finances and work out what you can change.

And if you’re in debt, that’s even more important. Get in control of your money now, grasp your debts firmly and take steps to plan a route back into the black. That way, whatever happens, you will at least be in a much better position than if you bury your head in the sand.

Here’s how.

Understand how much debt you have

The very first, most important thing to do is work out how much debt you currently have. Now that might sound simple but it may not be. After all, there are so many ways of being in debt now – different loans, buy now pay later schemes, overdrafts, credit cards, even money you owe to your energy firm.

If you are going to genuinely get on top of what you owe then don’t leave anything out. Sit down with a clean piece of paper and write it down.

And most importantly, don’t panic. The number may be alarming if you have drifted into a lot of debt but knowledge is power – once you know what you need to tackle you have more power than before.

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Work out your budget

Okay, while you’re facing up to some hard numbers, the next thing you need to understand is your current financial situation.

The best way to do this is to draw up a list of your income and essential outgoings. There are budgeting tools online and apps that might be able to help you with this (ready reviews first, make sure you don’t share any sensitive information) but you can just sit down with a pen and work out how much comes in each month and how much needs to go out.

Don’t forget to include food, commuting costs and other essentials, which it can be easy to overlook just because they’re not fixed monthly bills.

Whatever you have left is how much you have to pay towards your debts and cover the cost of socialising.

Cut the cost of your debts

Some debts are more expensive than other debts. For example, a credit card usually (not always) has a higher interest rate than a credit card. And smaller debts typically have higher rates than larger debts.

You may be able to reduce the amount you pay in interest by consolidating your wider debts into a single loan. And a single monthly payment can be easier to manage as well.

But that won’t work for everyone. The big, flashing, serious warning is that if you consolidate your debts and leave your credit cards open then you risk drifting back into credit card debt and ending up twice as badly off as before. You have to approach this with discipline and a debt-free focus.

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You should also check if you can repay smaller loans early or if that will mean paying an extra fee.

If credit card debt is the issue then a loan gives you less flexibility and may not be right for you. An alternative option is to apply for a balance transfer card that charges you 0% interest for a period, meaning you can just focus on paying down the actual debt.

There are lots of options and not everything is right for everyone. But once you know the full extent of your debts you have the power to make a battle plan.

Follow our eight steps to managing your debt and work your way to being debt-free. (Getty Images)
Follow our eight steps to managing your debt and work your way to being debt-free. (Getty Images) (Getty Images/EyeEm)

Work out the payment priorities

If you are struggling financially then make sure you’re prioritising the most important bills – your rent, your mortgage, your council tax.

When you are working out which debts to prioritise, use any spare money to pay extra towards the most expensive debts first.

Once you’ve cleared those, you will free up some cash (and some mental space) to focus on the rest.

Check your income

An astonishingly high number of people in this country do not claim the benefits they are entitled to. But, thanks to recent changes, Universal Credit is open to a far wider group of people. In fact, in certain circumstances, it is even possible to be a higher rate taxpayer and still qualify for some UC support.

So if your income feels like it can’t stretch far enough to cover your living costs without getting further into debt then take some time to find out if it could be higher.

There are a number of good benefits calculators online that can flag up to you if there’s a payment you’re missing out on. The charity Turn2Us has a good one, as does EntitledTo.

Read some stories

Getting out of debt is hard and it can feel overwhelming, especially at the start. Just like with a fitness journey, you need some inspiration.

Fortunately, there are any number of money bloggers and money savers who have already cleared their debts and who share their stories online. Seek them out, read about their journeys and you will know that the same is possible for you.

Maybe one day it will even be you sharing your story to inspire the next generation of debt-clearers.

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What if the numbers don’t add up?

Some people will tally up their debts and work out their budgets and realise that it will not be possible to get out of debt and still buy food and pay bills. If that’s you then the most important message is: don’t panic.

You are not alone and you still need to act to get it sorted. Nothing is ever so bad that it cannot be fixed.

The very first thing to do is approach a debt charity for support and talk to an expert about what the best solution is for you. There are companies that offer this service but they will charge you for doing so. So before you try those, see if you can get an appointment with a charity such as Citizens Advice or the charity StepChange.

Everyone has a route out of debt so keep calm and speak to an expert.