Most of us will be in some kind of debt at some point in our lifetime, but do we actually understand how debt works? Understanding debt can tell us a lot about how we need to manage it, and how we can avoid debt problems in the future.
What is debt?
Debt is any money that you owe to someone else, whether it’s a friend, a bank, a building society or an energy supplier. As long as you can comfortably afford to pay that debt back, it needn’t be a problem. Access to credit can be very useful, and things like buying a house and running a business usually depend on it.
However, if you find yourself unable to repay all your debts, problems can start. Your lenders will want to know why you’re missing payments, and what you intend to about it. If your debts are left unpaid, you could face serious action from your lenders.
How should I manage my debts?
Priority and non-priority debts
When managing your debts, it’s important to distinguish between priority and non-priority debts. Priority debts are your essential costs – debts that could result in serious consequences (like eviction, for example, or even imprisonment in some circumstances) if you don’t pay them in time. Priority debts include mortgage/rent, tax and utility bills.
Your non-priority debts include things like credit cards, overdrafts and unsecured loans.
You should always make sure your priority debts are taken care of first. However, that’s not to say your non-priority debts aren’t important – you will still need to pay them, and if you are having trouble you should speak with a professional debt adviser at the earliest opportunity.
Creating a budget
In some cases, creating a budget could help you to improve your financial situation and make your debts more affordable.
To draw up a budget plan, you’ll need to note down your monthly income (after tax, NI and any other deductions), as well as all your regular essential expenditure (mortgage/rent, food costs, secured debt repayments, household insurance, etc.).
Subtract your total expenditure from your total income, and what’s left is your disposable income – money that’s available to make payments to your non-priority debts, as well as spending (or saving) as you wish.
If your income isn’t big enough to cover all your financial commitments on a monthly basis, you’ll need to figure out where you can earn more – or cut back.
Cutting back
If you’re struggling to repay your debts, try to cut back in non-essential areas – nights out, takeaway meals, TV subscriptions, etc. Cutting back in several areas at once could save you a lot of money, which you can then put towards your debts.
If that’s not enough to help your situation, though, it’s time to contact an expert debt adviser.
Get debt advice
A professional debt adviser could recommend a debt solution designed to help you clear your debts. There are a number of debt solutions available, all designed to help people with different levels of debt.
Even if you can’t see yourself ever being able to repay your debts in full, a debt adviser may still be able to help. Visit the website of debt management experts Gregory Pennington