Seven steps to get out of debt

Being in debt can cause a lot of stress and frustration. To regain peace of mind, take one step at a time – by assessing your personal finances, budgeting and renegotiating terms with your creditors you’ll soon be back in control of your situation.

Step 1: Start dealing with your debt

Recognising that you’re in debt is the first and most important step. Take action and deal with your creditors in a clear and structured manner. By simply beginning the process and seeking solutions you’ve already made a giant leap forward.

Step 2: Know how much is coming in and know how much you’re spending

Look at how much you are spending compared to how much you earn. Get a pen and paper. Make two columns. On the first write down your income (make sure you include all sources on income in this column). In the second column make a list of all your expenses, starting with the most important.

This is a great exercise as many people don’t realise how much they are spending on a weekly/monthly basis. Once you’ve completed this task you’ll see how much money you have left to pay any outstanding debts. It’s also a good idea at this stage to create a monthly budget and stick to it.

Step 3: Make the most of your income

Know your entitlements: If you’ve lost your job or been made redundant you may be entitled to Job Seekers Allowance or Job Seekers Benefit.

Make sure you’re on correct tax band.

Know all the tax reliefs you may be entitled to such as medical expenses, mortgage interest relief, etc.

If you’re on a low income you may be entitled to employment support in the form of Family income support.

Have a look at www.welfare.ie or www.citizensinformation.ie if you’re not sure what you are entitled to.

Step 4: Where can you make reductions to your expenses

By making a few simple changes to your spending habits you can make significant reductions to your expenses.

Create a weekly/monthly household budgeting plan and stick to it.

Switch and save - compare prices from service providers (gas, electricity, etc.) and switch to the one that can offer you the best deal.

Shop around for bargains for household goods – large supermarkets in Ireland now publish weekly special offers where savings can be made on regular purchases.

Haggle for better prices with existing providers.

Opt for low interest or 0% interest credit cards.

Don’t over draw on your bank account and pay all your bills on time so that you won’t incur any penalties for overdrawing or late payments.

Shop around for the best car and house insurance policies each year – don’t just presume that the company you are with is the cheapest.

Step 5: Prioritise your debts

It’s a good idea to make a list of who you owe money to (your creditors) and to prioritise your debts. Some debts will be more important than others. Secured debts, such as your mortgage, are more serious – if you don’t pay your mortgage you could face losing your home. Other examples of priority debt include rent, secured loan repayments, utility bills such as gas and electricity as well as insurance payments.

It’s important not to panic though. Once you’ve made your list of debts in order of importance you can contact each creditor directly. After you’ve made contact with the most important creditors you can make a start on your secondary debts. These include store card and credit card repayments, repayment on unsecured loans and utility bills such as telephone and internet providers.

Step 6: Get in touch with your creditors

If you owe money you should contact your creditors as soon as possible to make arrangements to get debts paid. You may be able to renegotiate payment terms. Also, if interest is being added due to non payment you should ask that this be frozen.

Start with priority debts and it’s a good idea to put all communication in writing. You could explain why you aren’t able to make the repayments. You can back this up with financial records if you wish – the main thing is to be honest. Negotiate a minimum payment amount.

Remember only pay back what you can – you’ll know this by assessing your personal circumstances. If a creditor won’t accept your offer of reduced payments you should make the lowest payments anyway as it will be reducing your overall debt. And very importantly any agreement you make with your creditor you should receive in writing.

Step 7: Devise a strategy for your long term debt

Always pay bills on time by setting out your repayments on a calendar – remember that the avoidance of late penalty fees means more cash in your pockets.

Stick to your budget plan as much as possible; keeping a disciplined approach to your spending will serve you well in the long run.

Keep a cash diary so that you are fully aware of how much you have spent within a week/month and to keep track of what you have spent money on.

While all of the above points may help you in your long term debt strategy you may benefit from speaking to a debt expert who will be able to create and put into action a tailored debt management plan – take control of your long term debt by contacting a debt management company today.