Debt Is Not A Dirty Word
Being in debt is not the worst thing a person can be.
The dichotomy between 'good debt' and 'bad debt' is overblown in my opinion, there's rarely enough nuance. Rich people might be mortgaged up to the eyeballs but if they've got a nice home nobody's going to be lecturing them. Debt is a tool for some people, if you're aware, clever and cautious about it - and it would be great if it could be a tool for us.
Having said that, unmanageable debt is absolutely insidious. It’s not the right time to cover that here, although we will over time, but if debt is causing you real problems - financially or mentally - here are a few links to spaces which provide help:
Step Change - The UK’s leading debt charity.
Citizen’s Advice - Impartial advice to citizens on legal, debt, housing and consumer issues.
National Debtline - Offers free advice and resources through their phone and web helplines.
It's nothing to be ashamed of, and taking that first step to a free life will be an incredible relief.
Unmanageable debt aside, you won't find me talking about good and bad debt. I'm just not interested in that moral discussion. Blurgh.
What I mean by unmanageable debt, is debt on which you can't pay the minimums off. If you are able to pay the minimums off each month but the interest rate is high - then it's time to get serious about debt payoff.
Let’s Get Down To Clearing That Debt
If you're paying higher interest on your debt than you’re receiving for your savings or investments, then you're losing money.
The facts are really quite simple, and if this is the case for you then the way ahead is also simple - though not necessarily easy.
First thing's first.
Here’s My Step-By-Step Debt Paydown Plan
1). You need an emergency fund.
It's very easy to think that every single penny should be going to paying off your debt, it would be my natural reaction too, but if one of the reasons you got into debt was because you couldn't pay for an emergency (maybe you lost a job, were forced to move, car broke down etc.) then you'll understand the importance of having money set aside for just that.
This means that when an emergency comes up as you’re paying down your debt (as it no doubt will) you'll be able to actually deal with it without adding additional debt.
So, carry on paying your minimums, and starting socking away enough money to cover 3-9 months worth of expenses in as high interest, easy access savings account as you can find.
In the meantime…
2). Gather together your debt data.
You want a list of everything that you're paying - the amount, the term, the interest and any conditions. Include credit cards, payday loans, store cards, buy now pay later services like Klarna, student loans, mortgage.
Get it all written down.
For our purposes, you want to prioritise the higher interest rates - that is 8% and above, which most credit cards, payday loans, store cards etc. will be.
If the interest is under 8%, it counts as a lower interest rate, and paying these off becomes less imperative when you know you can generally make more than that in the stock market. This would usually be the mortgage and it's probably your student loan but there is a lot of variation there so make sure you're clear on your terms.
At this point:
3). Is consolidating for you?
Perhaps you have access to a 0% credit card, just a lower rate or even extra benefits which might be worth transferring the higher rate balances there.
Look out for:
Any fees or penalties which might make it less of a deal.
Often the 0% interest is a fixed time period after which the interest radically increases - this may still be lower than what you're paying but be especially careful about this if you are still creating your emergency fund which would delay when you can pay off the full balance.
Getting this far is amazing, in the next post we detail the two basic methods to debt payoff and you’re going to want to sign up for the newsletter this week because it’s a little freebie offer!
Love Eleanor. xxx
