Tackling debt – particularly if you have multiple debts spiralling out of control – can feel like a never-ending uphill battle, full of anxiety and regret. It can feel overwhelming to a point we simply stop looking at our bank accounts and pretend nothing is wrong.
But the more these debts grow, the harder they become to manage. Facing those debts head-on is the only way to regain control of our finances.
Just remember, nobody needs to face their debt-demons alone. Outside of our immediate family and friends, there is a huge community of other Britons (via forums, Facebook Groups, etc) who are all striving to become debt free and will be able to offer moral support. There are also plenty of blogs like mine, too, of course!
You’ve read this post and don’t believe you have the wriggle room in your budget to pay off your minimum debt repayments or catch up on bills? Then don’t fret. There’s a range of free debt advice services (such as StepChange or National Debtline) that can help you. They’ll guide you on the next steps, with tailored advice and/or support for your specific situation. Never pay for debt advice!
With all that in mind, here’s a seven-step guide to becoming debt-free, from start to finish. I’ve taken some inspiration from Dave Ramsey’s “7 Baby Steps” here; but I’ve added my own spin on it. Let me know your thoughts in the comments!
Write Down All Your Debts
First thing’s first; it’s time to acknowledge your current financial position. Embrace it. Accept it. But most importantly, forgive yourself for it. You can’t change the past, but you can make changes to improve your future and beat down this debt. So here’s the first of our seven-step guide to becoming debt free.
If you’re like many others struggling with debt, and you aren’t even sure who or how much you owe, then this is where you start.
Make a list of each debt, either on paper or in a spreadsheet, whichever works best for you. These include: credit card balances, loans, mortgages, missed council tax payments, missed bills, etc.
For each debt, include the below information where possible:
- The name/type of debt and who is owed the money (e.g., “Energy Bill – British Gas”, or “Credit Card – Capital One”).
- Any reference number for your account (in case you need to contact them).
- For missed payments: the date the payment was originally due.
- The balance (amount owed) of each debt.
- The interest rate (APR) of each debt (even if 0%; it’s useful to jot this down).
- The monthly minimum payment or fixed payment expected for each debt.
You may decide to separate any missed household bills – such as council tax, energy bills or phone bills – from longer-term debts such as credit cards, loans, or mortgages. This is fine and may also help when prioritising paying off each debt later.
Now that you have this information to hand, it’s time to take the next step.
NOTE: I want to again stress that if you’re in a position where you do not believe you are able to make payments, then obtaining free debt advice from one of the above services is a sensible option.
Assess Your Spending and Build a Budget
Now that you know what debts you have and their minimum payments (we’ll come back to them shortly), it’s now time to look at your past spending and build a budget. This will help you understand where your money is going and adjust accordingly.
This stage is arguably the hardest from a psychological standpoint. However, it’s absolutely crucial to get on track. So, bear with it and trust the process. As I said above, you must forgive yourself for past spending, there’s nothing you can do about it, but you can stop your future self from doing it.
Assess Your Spending
First thing’s first; assess your previous spending. I know, you don’t want to feel ashamed, but this is part of the process and it’s something we all feel at this stage. You can do this.
Here’s the steps I took when I begun my debt-busting journey:
- Find and download your last 3 months of bank statements for all accounts you have
- If this sounds like too much, then focus on the previous month first. I’d suggest completing at least two months, though, as a minimum
- Use either Microsoft Excel or a physical notebook to write down EVERY transaction for each month; both incoming and outgoing
- Total up your income for each month
- Categorise your outgoing transactions in a way that makes sense for you. For example: rent/bills, groceries & household, travel (fuel, insurance), eating out, subscriptions (Netflix, Spotify, Xbox Game Pass, etc), entertainment, gifts, etc
- Total up each category per month and look for trends and overspending. This will be in the next step
While this step isn’t strictly required, it is extremely helpful and I highly recommend it. When I did this, my mind was blown at how much I spent on certain things. In my mind, I was just buying a treat for myself here and there, it was nothing major… But those treats really do add up quickly, and I was shocked at the totals.
More importantly though, once I was armed with this information, I was blown away at how easy it would be to reign that spending in! I simply needed to see it to believe it!
Build Your First Budget
Now that you know where your money has been going, it’s time to decide where your money will go moving forward.
The idea of budgeting really stumps a lot of people. They get stuck in a mindset of “but what if something goes wrong?” and “I’m not good with numbers, what if there’s a mistake?”.
A budget shouldn’t be considered a super-restrictive, be-all and end-all tool. No budget is perfect. Particularly at the beginning. You might get things wrong, or an unexpected event might crop up, and that’s 100% okay. By merely creating a budget and attempting to stick with it, you’re half way there and your mindset will begin to shift. The key is to not beat yourself up if things don’t go perfectly in the first month. Month by month, you can make small tweaks that will quickly add up in the long run.
Here’s the basics of how to create a budget:
- Write down your total income per month (or an average if your income isn’t always the same), this is your starting point
- Create a list of all essential expenses (rent, council tax, utilities, minimum payments on debt, transport to work, etc) and a cost for each
- Consider also including the date in which each payment is paid
- Subtract all essential expenses from your total income. The foundation of your budget is set; your essentials are covered and you’ll keep a roof over your head
- Next, create a list of all other expenses, such as: subscriptions, prescriptions, etc and their cost
- Subtract these from the amount left over above
- This leaves you with a set amount of money to budget on groceries & household needs, paying off additional debt, savings, or for one-off expenses
- Allocate a set amount per month for these categories, prioritising groceries & household and savings
- Be sure to note down and include any other one-off expenses you expect may crop up in the month, such as Birthdays or other special events
By completing the “Assess Your Spending” process above, you’ll actually have a lot of these figures at hand already! Meaning it should be easier to allocate your money.
It’s now time to follow through with this budget and try your best to stick to it. Print it out and/or stick it on your fridge or somewhere else that’s obvious, so you can see it regularly. Do your best to keep track of spending as you go, too.
Improve And Adjust Each Month
Once you have a budget in place, it’s important to improve on it each month and adjust as needed. Remember, it’s nigh impossible to perfect a budget first time round, so don’t be disheartened if it doesn’t go perfectly. This is normal!
You can now also begin to focus on reducing your expenses where possible, increasing the amount of money you’ll have available each month. For example:
- Do you have the best water, gas and electric deals? Could you reduce your consumption at all?
- Can you reduce your mobile phone and/or internet bill by switching or downgrading?
- Do you have unused or unnecessary subscriptions you could cancel or downgrade?
- Can you downgrade to own-brand products and shop at a different supermarket to reduce grocery costs?
- Can you buy household products in bulk to reduce costs?
- Take advantage of cashback apps/services for your essential expenses.
Save £1,000 as a Starter Emergency Fund
Now that you’ve assessed your spending and have begun budgeting each month, it’s time to build a starter emergency fund.
An emergency fund is your lifeline in the event something goes wrong, such as an injury, bereavement or losing your job. Generally speaking, it’s best to have an emergency fund that can cover at least three months of your monthly expenses.
However, if you’re just starting out and do not have any money saved at all, it’s absolutely crucial to begin building a ‘starter’ emergency fund.
The intention here is to build up a £1,000 emergency fund as quickly as possible. This is to ensure you are not forced into taking out more debt to pay for an emergency, such as a broken washing machine or a vehicle repair. This would be disastrous and likely force you into taking out more debt.
Speed is of the essence here, and this should be your top priority over almost everything else (yes, even social events) until you have £1,000 in your savings account. Without an emergency fund established, all the hard work so far could fall over. So, it’s time to go all-in and increase your cash by any means necessary.
Simple Ways To Make Quick Money
Here are just a few methods you could consider to increase your emergency fund quickly:
- Request more hours at your current job(s) and put this extra money straight into your emergency fund.
- Go through your wardrobe and sell any unused clothes on Facebook Marketplace or an app like Vinted or Depop.
- Go through your other belongings, such as video games, DVDs/CDs, collectibles, unused gadgets, etc. Sell them on eBay, Facebook Marketplace or somewhere like CeX.
- For mobile phones, tablets or laptops, ensure you know how to securely remove all of your data before selling.
- Ask friends and family if there’s anything you can do for them for a little cash. If you’ve got a green thumb, you could offer to mow and tidy up their garden. You could offer to clean their home, pet sit or babysit. Got a particular skill? You could offer lessons; piano or guitar lessons, coding lessons, how-to DIY lessons… The possibilities are endless, really!
- Do you have a spare bedroom, an empty garage or an unused parking space? Rent them out!
Make Spending with New Debt More Difficult
Okay. You now have a budget and a starter emergency fund; three steps of our seven-step guide to becoming debt free are complete. With the hardest parts out of the way, it’s now time to put safeguards in place to prevent having to start this process again. You’re only human, and self-sabotage is unfortunately something us humans love to do!
Falling back into old habits and using new debt even once could put all the work you’ve put in so far to waste. It will also make paying off your debts take longer. So, it’s time to remove that temptation as much as possible. It should be a real chore to use any available credit.
Here are a few things you could do:
- Close paid-off accounts. This will lower your available credit and reduce your ability to use it. There’s a small caveat here in that it can temporarily reduce your credit score. It’s also worth nothing that keeping at least one account open is beneficial in terms of credit history.
- Cut up your credit cards. Determined not to use your credit cards? Cut them up!
- Remove credit card details from websites. Cutting up your credit cards likely isn’t enough. Remove your card details from any websites you regularly buy from. As an extra step, remove the details from your web browser’s auto-fill as well. In all likelihood.
- Lock your credit cards away. If you don’t like the idea of destroying the cards, then lock them away somewhere that’s difficult to access. If you have a supportive partner or family member you can trust, ask them to hide the cards for you.
Pay off All Debts (Except Mortgages) Using the Avalanche or Snowball Method
On to step four of our seven-step guide to becoming debt free; actually paying off some of that debt!
Generally speaking, there are two main ways you to go about doing this effectively. These are known as the “debt snowball” and “debt avalanche” method. I’ve actually covered both methods in depth in this post, along with which might be suitable for your situation. So, I won’t go into too much detail here.
The principles are the same for both the snowball and avalanche method. The key is to pay the minimum payment on all but one repayment. You’ll focus all of your attention on this one debt until it’s paid off, moving onto the next debt. This process is repeated until all debts (excluding mortgages) are paid.
In the case of the snowball method, you’ll focus all your efforts on paying down the smallest debts first. On the other hand, if going for the avalanche method, you’ll be focusing on the highest interest debts first, regardless of their size.
Whichever method you choose, it’s important to stick to it and truly focus on one debt at a time. Every extra penny you earn outside of your already-established budget (e.g., overtime pay, side-hustle income, etc) should go towards this debt; nothing else. The faster your debt shrinks, the less interest you pay over the long-term and the earlier you become debt-free. Not only that, but the mental burden will also begin to lift as you become less worried about how to make your next payment.
Build an Emergency Fund Covering 3-6 Months’ Worth of Living Expenses
In parallel to the previous point, or once your debts are fully paid off (this will depend on your individual situation and how you’ve allocated your budget), it’s time to build up the rest of that emergency fund.
Experts suggest you should aim to have an emergency fund which can cover between 3 to 6 months of living expenses. That’s your rent/mortgage, council tax, utility bills, home and car insurance, food and household items, plus anything else that’s essential to you. Aim for 3 months’ worth of expenses first, then build up to 6 months.
Regardless of whether or not you’d receive sick pay in the event of an injury, you should assume zero other income, meaning your emergency fund should cover all three months in full. Remember, there are other emergencies whereby you do not leave your workplace. Examples include a vehicle breakdown, a sudden death in the family resulting in funeral costs, flooding or even a house fire (insurance payments usually take time!), etc. So it’s a good idea to be ready for anything.
Let’s suppose you’re a single person living alone. Your living expenses are £1,500 per month, all-in. In this case, you should aim for an emergency fund of between £4,500 and £9,000.
Pay off Any Other Debts and Build Your Wealth
Eventually, through hard work and consistency (hopefully, with as few hiccups as possible), you’ll now have achieved two huge goals. You’ve paid off all your high-interest debt, and you now have a 3-6 month emergency fund. Congratulations, the hardest part is now over!
From here, you are in full control of your future. You are in the driver’s seat and the possibilities are endless. You can either decide to undo all the incredible work you’ve done, or you can build on your successes and continue on the road to financial freedom.
If you have a mortgage, you may decide you want to finish the debt-busting job and get it paid off as quickly as possible. If you don’t yet have a home, you may want to begin saving for a house deposit (remember; do not use your emergency fund for this!). Perhaps you don’t want to do either of these, and instead want to begin your investing journey and begin building real wealth, or start your own business.
The choice is yours!
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