10 - What if I am financially stuck or struggling with debt?

Before worrying about what investments you should be making (to give you that lovely return each month), you need to get rid of any debts you may have. 

One thing that I overcame when I began my life transformation was debt. I was in a high paying job, but got sucked into the big house, nice cars, camper van, all the sports gear, holidays, the list goes on, until one day I had to share the news that we had more going out than we had coming in. 

I am not interested in "keeping up with the Jones", I live my life and you live yours. But I also get that when you are part of a family unit, not everything is in your control. Talking about finances with your loved one, carrying out your family financial audit and regularly ensuring you are in a healthy position now and moving forward will set you up for lifelong success. 

If you are a band of one, it is perhaps even more important as you have no excuse but yourself! You may find it supportive to talk with a trusted friend or even a qualified financial planner and carry out your financial health audit together. Having an accountability partner that you don’t want to let down (and vice versa) will be beneficial to you both. 

Despite monthly budgeting, we got into so much debt it seemed so difficult to get out of it. I nearly said impossible, but of course I had a few spreadsheets and scenarios! “If we paid off X then it would take us Y long to get debt free….”.

Part of my personal journey was to get control of my finances again, to have clarity and control. This was one of the first radical steps that I took in my life transformation, and believe me it wasn’t easy as I had combined finances for over a decade and we had very different mindsets towards money. 

I am not suggesting that you make radical changes, unless of course you have been putting something off for a long while and you know you need to! Think about what steps you need to take. A conversation? Taking a look at the numbers? An audit (look at what is coming in v’s what is going out)?

From that transformational moment onward, I have budgeted and managed my household finances successfully. I also now have a Virtual Assistant that helps with my business financial management AND my personal financial management - believe me when I say that it is easier and more affordable than you may think, about the same as a cappuccino each month! I simply don’t have the time to do it myself in the way that I would like, and therefore I invest in help. Each month, I review a summary of what has come in, and what has gone out in my businesses AND my personal life - this is an absolute game changer. There is a simple and quick way that you can manage your own finances which I will share with you next week!

You have to ask yourself if you can afford your current lifestyle, and if you can’t you need to make a change. Take some time to answer these questions:

1. Do you know how much you have coming in each month? (Check out blog #8 for the steps).
2. Do you know how much you have going out each month?
3. How much do you save each month? Pension, ISA’s, Investments? 
4. If you have debt, do you have a plan to eliminate it?

If you are in debt, then I empathise with you. You are not alone, it is a horrible trap that so many of us find ourselves in. And if you are not sure, well if you have a bank loan, credit card, overdraft, or car loan I am afraid you are in debt. 

There are of course different types of debt, good debt gives you a return (such as an investment property with a mortgage on it that gives you a return each month), bad debt does not. To own or not to own your own home is a topic for another day, right here I will leave it out as it very much depends on your perspective and personal situation. 

There are so many ways to fall into debt, too much temptation and not enough education about how we should all be living below our means and not above it.

It may feel great driving around in the latest model car, but how much is that costing you? For a long time I thought I wanted a shiny Mercedes because I could, but when I got my head around the numbers I opted for a £5,000 Ford that I saved for, and paid for outright. It is a workhorse! I love that I don’t have expensive car payments going out each month and that I own it. And it is my intention to use that for as long as I can. Reflect on what is truly important to you, looking cool to your neighbour next door, or never having to stress about finances again? Living a life of financial worry that you can’t afford, or one that you can where you can also afford to save, invest and follow your dreams. 

Debt is a trap. It is always going to be a temptation around us, having clarity on your finances and a Life Strategy helps to keep you on track.

If you are in debt, here are some steps to take.

1. Pause, do not increase your debt. If you think you need that new gadget or new pair of shoes, you probably don’t. And if you do, then save up for it. 

2. Continue to pay off at least the minimum required amount from your debts, if you do not then you could put your credit rating at risk for 6 years! 

3. Calculate the exact amount of debt you have. Add up all the credit cards, store cards, bank loans, overdrafts the lot. A mortgage is different, whilst it is still debt we will come back to that one another day. For now, keep it out of your debt calculation.

4. Work out how much disposable income you have (refer to blog post 8 for how to audit your finances. Add income together, deduct outgoings and what remains is the disposable income).

5. If you do not have any disposable income right now then you need to look for ways to reduce your monthly outgoings. Take a look at your outgoings one by one and ask yourself, is it necessary? Can I remove this cost completely? Can I reduce or downsize? 

6. Ensure you have between 2-6 months worth of savings as an emergency fund. Don’t be tempted to pay off debt using this. This step is vital for your financial security and peace of mind. Factor in any key events such Christmas or birthdays that may require a little extra spending.

7. Make a plan. There are many ways to reduce and eliminate debt, some of the most popular and successful are below:

a. The Snowball Method is an accelerated payoff strategy that can save you both time and money. To get started, make the minimum payment on all of your debts. Then, if you can put additional money toward your debt each month, apply it to the debt with the lowest balance first.

Once you've paid off that debt, add the amount you were putting toward it to the minimum payment on the debt with the next-lowest balance. You'll keep doing this with each debt, creating a snowball effect that could help you shave time off your repayment plan and save hundreds or even thousands on interest.

With this approach you will see quick wins early on in the process which can help you to stay motivated. 

b. The Avalanche Method also has you focus on knocking out debts one by one, but targeting the balances with the highest interest rates first.

Compared with the debt snowball method, the debt avalanche method may not give you early wins. For example, if the card with the highest annual percentage rate (APR) also has a high balance, it can take a long time before you pay it off. But this method could help you save more money by eliminating your most expensive debts first. 

When you get past the first debt, the momentum can be substantial. 

c. Debt Consolidation Loan may work for your situation, as long as you don’t get any further debts after (get rid of all other types of debt to avoid temptation!). Benefits include a set repayment schedule and fixed monthly payments. Debt consolidation loans can help you secure a lower interest rate and simplify your repayment process by replacing multiple monthly payments with just one.

Personal loans have lower interest rates than credit cards on average, but your rate will depend on your credit score and other factors. If your credit is fair or poor, the rate you qualify for may be too high to make it worth it. Fortunately, many lenders allow you to get pre-qualified and review rate offers before you apply, which involves a soft credit check that doesn't hurt your credit score.

If you're considering a personal loan to pay off debt, make sure the new monthly payment fits within your budget. If it's too high, it may be difficult to keep up.

8. How much more can you put to paying off your debt? Be clear about how much you can put towards it each month using one of the above methods and stick to it. Every time you come into some money (e.g. selling Granny’s old golf clubs for £50) put it towards paying down your debt. You will have a double windfall, as you will also not be paying interest on what you pay off!

9. Get help externally - If you are really concerned, and you have way too much going out than you have coming in and no ability to change it (step 4), there are lots of charities that help with consolidating debt such as Step Change. They will help you with your financial audit, take a look at what you can realistically afford and will send letters to the lenders on your behalf to make an affordable offer. This will almost certainly impact your credit file to check out the full website and speak to an advisor, but it is a sound solution that can give you peace of mind in a stressful situation.

9. Celebrate every win! Whether you use the snowball, avalanche or consolidation method, celebrate every milestone that you reach (without increasing your debt of course!). This will help to keep you motivated, and moving towards your goal of financial freedom. 

You will unlikely be able to do any of the above if your husband/wife/partner is still spending money like it’s pay day everyday. You may come across resistance, remember, you've got this and you have options. If you need some independent support then remember there are advisors available in the charities mentioned above, and whilst I am not a financial advisor, I am a life coach. Drop me an email at [email protected] or schedule a discovery call using the link below. 

Recognising your debt, and being honest with yourself is challenging but a necessary first step. You can build a life of abundance, but it will need to be on a solid foundation of good financial health and regular management. 

I take great pride in seeing my accounts in the positive, my pension and investments topped up each month and my credit rating staying high. It has taken me a few years to get here and some big decisions, but the freedom and peace of mind it has given me is worth every challenging decision and day. 

I am now on my journey to financial freedom as I have a clear plan, my Life Strategy and you can too. 

Always with love, 

Elsa x