Christmas is now over and many of us are now beginning to realise that, despite our good intentions, we spent far too much money.
But if you are counting the cost of Christmas, you are not the only one! Recent research from investment company Hargreaves Lansdown indicated that the average person in the UK spends £538 on Christmas and overspends by £153. Given that these figures are average, it means that many of us are facing an even bigger overspend.
If you are in this situation you will at the very least be feeling annoyed with yourself. Perhaps you are even panicking about how you are going to manage financially to get to the end of January – which always seems to be a very long month!
So how can you change all this? What can you do differently in 2019 to ensure that you do not end up in this situation yet again?Why not try our Six Steps to Solvency?
1. Take a good look at your finances
It can feel very uncomfortable to start looking closely at our finances. But it is really important to do this so that you can understand where you are at and where your money is going.
The best way to do this is to make a list of everything to do with your money. This should include:
- Assets you own (eg home, car, savings)
- Debts you owe (eg mortgage, loans, credit cards, overdrafts)
- Regular income (eg salary/wages, benefits)
- Regular payments (eg mortgage/rent, loan and credit card repayments, household bills).
This should begin to help you see how healthy your finances are looking.
2. Pay off bad debt
The best way to start sorting out your finances is to pay off bad debt. Our recent article The Difference Between Good and Bad Debt explained that a mortgage is generally viewed as good – or acceptable – debt because you are using it to invest in an asset ie your home. However unsecured debts such as credit cards are bad because they can get out of control very quickly. This leads to more interest being added to the balance and you can end up just paying off the interest each month and not reducing your debt at all.
So one of the key things to do when getting your finances under control is to pay off as much bad debt as you can. Even if this means dipping into any savings that you have, it could be well worth it. Once you no longer have monthly credit card repayments to make, it will release that money for other things.
3. Start budgeting
There is something about the very word “budget” that makes most of us want to run a mile! But the reality is that unless you plan your regular spending carefully, and know where your money is going, it is easy to slide into debt without any idea why.
So, building on your work from Step 1, make a list of all the money you spend each month. Not just your mortgage/rent and household bills etc but also your spending on everything else, including food, clothes, transport, entertainment, leisure etc. Include absolutely everything.
This should give you a good idea of how you think you are spending your money but you then need to keep careful records for at least a couple of months of where every penny is actually going. Use either a notebook or a phone app but keep track of everything.
You may well be surprised – or even horrified – to find out that you are spending a lot more in some categories than you ever realised. But once you know, you are then in a position to start making changes to get yourself in a better position.
4. Balance the books
After you have tracked your budget for a couple of months it should become clear whether or not you have enough money coming in each month to cover all your expenditure. If so, you are in a healthy financial position. Be careful with your spending, pay off any remaining bad debt as soon as you can, then start to save (see Step 5 below).
But if your budget shows a shortfall – ie you have less money coming in than is currently going out – then you need to take action quickly. The first thing to do is to check every bill to see if really is essential and, if so, whether you can get a better deal – for example by switching suppliers. Then look at every other item of expenditure and see where you can cut down. This may mean adjusting your lifestyle for a little while – for example not going out as much – but it will be worth it to get yourself sorted.
Also look at ways of bringing in extra income, for example changing jobs, taking on extra work, selling items or taking in a lodger. There are various ways of doing this and they may not all be easy but will help you to get your finances back on track.
Another option to consider is to take out a small loan to pay off all your existing debts so that you end up with just one affordable monthly repayment instead of several different ones. If you do this, it is really important not to increase the overall amount of your debt, but see this as a last chance to pay off old debt and make a fresh start towards a debt-free future.
5. Keep at it!
Last but not least, be aware that to keep your finances in good shape is a long term commitment. The above steps will help you to start tackling problems and getting things back on an even keel, but you need to keep at it and not let things slide. So see them not as a one-off quick fix but as the start of a new lease of life for your finances. Keep working away at it and you will reap the benefits long-term.
At LoanPig we wish you the very best for 2019 and hope that this is the year when you do manage to begin sorting out your finances once and for all!