Ireland’s Guide To Money And Living

Getting out of debt means knowing how you got there

The golden rule on personal finances is to spend less than you earn. Sounds so simple. It may also sound unattainable for you at this point, but think of the consequences of not getting on top of your debt – it’ll just keep getting worse as you continue to spend more than you earn.

Now here’s the bad news: there is no magic wand. Your debt issues can only be solved through time, discipline and focus. The good news is that it is possible to do it. Here’s how.

The most important aspect of getting out of debt is realising how the debt grew. Ask yourself what aspects of your lifestyle or circumstances led to your current financial difficulties. With this knowledge, you can focus on those aspects. So, with pen and paper ready, let’s get to work.

Step 1: Get a Plan in Place

For this plan to work you have to be honest. There is nothing to be feared; after all, there are many people in the same boat.

Draw up a list of your income on a monthly basis including your wages, overtime, bonuses, investments (dividends, interest), income from a rented parking space or property and so on. If some of these amounts are unpredictable, take the worst case scenario, namely your monthly salary without your inconsistent extras.
Next, make a list of all your outgoings. This is where the honesty really matters. Your mortgage or rent, electricity, gas, food, childcare, mobile phone bill, broadband, travel, entertainment costs, clothing, coffees, gym membership, medication, financial products such as mortgage protection, health cover, income protection, credit card bills, credit union and bank loans and anything else you can think of. At this point, you will find your monthly expenditure exceeds your income and that’s to be expected. That’s the whole reason you have undertaken this exercise.

Your next step is to divide your outgoings into flexible and non-flexible payments.
The non-flexible items are the outgoings you simply have to make – you can’t not pay rent (or mortgage) for example. Other stuff that falls into this category might be TV licence, running your car, paying for childcare, loans and credit card bills. Having said these are not flexible, you can look at restructuring your unsecured loan repayments such as bank or credit card loans. They are not attached or assigned to your house which means you can’t be made homeless if you default on these. I’m not suggesting you stop paying but negotiating a less onerous arrangement for a period might be an option.
The flexible items should include the payments you know you can cut back on or do without for an extended period of time. Things like your grocery bill, utility bills, spending on clothes, entertainment, travel and so on.

Step 2: Reduce the Cost of Borrowing

Credit cards: – there are a number of 0% deals available but if that option isn’t open to you, you can look at alternative arrangements with your existing provider. Many credit card companies will reduce your interest rate for a period of time just to retain the business.
Loans: – your local credit union and indeed your bank may have some more attractive options. I don’t recommend going down the secured loan route as the possibility of defaulting on these repayments may cause bigger problems in the long run, but it may be possible to consolidate your loans or get better rates than you currently pay.
Mortgage: consider an interest-only facility, a moratorium or extending the term. Mortgage providers are willing to work with you but you have to communicate with them.

Step 3: Cut Variable Costs

Have a look at that extensive column you drafted with flexible arrangements. Go through them one by one and identify ways of doing without or cutting back whether it’s by sourcing cheaper forms of credit or simply spending less. Sounds fairly obvious but you’d be surprised how many areas of potential savings you might have overlooked.
Don’t forget to review your financial products such as your private health insurance, mortgage protection, life assurance, savings schemes and serious illness cover. There are potentially great savings to be made by closely looking at these. While we’re on it, are you familiar with the tax relief and social welfare benefits you are entitled to claim?
Having made your savings, check your plan again to see if you are back in the black again.

Step 4: Look for Assistance

There are services that may be able to help you such as the Money Advice and Budgeting Service (MABS) and in extreme cases, Personal Insolvency Practitioners (PIPs) who will assist you to reach agreements with your creditors. Be careful: there are organisations and individuals who will claim to eradicate your entire debt portfolio. Be very cautious of the outlandish statements being made by some of them. Debt cannot be wiped out as easily as that.
Money Adviser is adept at helping people overcome personal financial worries of any kind using strategies such as budget and financial plans. Our service is fee based, but takes a holistic view of your finances rather than looking at any one issue in isolation.