With
the UK economy teetering on “double-dip” and the global stock market acting like a nervous horse at a fireworks party, the overbearing message from successive governments has been to “spend our way” out of recession. This has led to the tritely comforting but rather short-sighted excuse of treating ourselves to expensive good and services as “we’re doing out bit”.
Sadly, as with most financial smoke-and-mirror acts, the final reckoning never misses a curtain call. All the shiny things purchased with credit cards and on purchase agreements need to be met with payments and for consumers more hard pressed than ever with inflationary costs, this is proving difficult. Secured loan repossessions are increasing, and a boom industry in selling these on is slowly gathering pace. For those with a number of store credit and other credit cards, the potential to miss a repayment and get into a spiral of bad credit is increasingly likely.
What’s required is not a “fiscal stimulus” (printing more cash and debasing the raw currency on which it is based), but an injection of something closer to home: common sense. Ignore what the shiny Whitehall suits are telling you. These are people on a salary at least twice the national average and that’s not counting what they have running on directorship positions and executive committees on the side. These are not the kind of people who will be worrying about whether they can stretch their budget to a family roast at the weekend and, if they ever did, would end up charging it on taxpayer’s expenses anyway. The financial masterminds at Number 11, the bear pit stock traders and bank mandarins have all shown that they are no more capable of soundly running the nation’s finances as any other person, so it’s down to you to ensure that you can emerge from the financial crisis with your balance intact.
Firstly, assess your current outgoings. Take an overview of your last three months bank statements and list all the money going out of the account, including standing orders, direct debits and cash withdrawals to fund day-to-day expenses and entertainment.
Next, add up the money going into the account from wages, bonuses, benefits or whatever else gains you an income. Subtract the outgoings from this amount.
Ideally you should be left with a positive number. This is the amount of disposable income you have left at the end of the month. It may be depressingly small, in which case you can look at the incidental expenses, especially meals out, shopping bills or cash withdrawals to see if you can scale back on the outgoings. Unless you have already factored in savings and pension, you will also need to find an amount from this total to put away for savings too.
If you end up with a negative figure, you are likely in a position where you will be attracting an increasing amount of debt. Although you may be keeping things within the limits of your existing credit arrangements (such as an overdraft), be wary that an extended period of debt will still trash your credit score and lenders can always change the terms and conditions of the facilities they offer: as the financial situation hurts their profits, they are less likely to extend favours to you.
The first step is to take action. No debt problem ever disappeared on its own, and with the odds of winning the lottery approximately eight times less likely than being hit by lightning, no solution will be had by ignoring things and hoping for the best.
Assuming that you cannot influence the income side of the equation (although improving your income to above its current level is a definite plus if you possibly can), then a serious look needs to be taken at your outgoings.
It’s a lie that it isn’t fun to be frugal. A great deal of satisfaction can be had knowing that that heroic self-sacrifice you just made is going to be one less creditors sending you nasty letters or phone calls. By living within your means and cutting out luxuries and unnecessary extravagances, you can start clawing back that negative column and paying off your debts. True, you will have to spend less, which will involve cutting back on favourite treats, or going out so much, or buying so many nice things. However this doesn’t mean that you will never have another treat, meal out or new jacket again . . . you are simply putting in an action plan to deal with the current financial situation.
Meeting scheduled repayments is a must, especially loans secured on your property. If you have a loan on your car and this is essential for you to earn an income, then make sure this is repaid on time too. It can often be a good step to take a consolidation loan; this is an amount that covers individual outstanding debts into one repayment, often at a lower interest rate than many of the smaller debts will be charging. If you are considering this, go through the calculations with a qualified debt advisor or Citizen’s Advice Bureau . . . you don’t want to be paying more interest off than you need to.
Attack your debts first: the longer you have outstanding debt, the more of your actual cash goes on to covering interest than paying off the loan sum itself. See if you can overpay wherever possible. On a mortgage this will save you thousands of pounds over the typical term of the loan (25 years), but it’s also useful on smaller loans or credit card bills too as this will clear the outstanding balance faster and help improve your credit rating.
If the scheduled repayments are in excess of your income, then you need to make the creditors and your bank aware of this. They will often offer help, or plan out a series of repayments so that you can still provide some sort of payment without bankrupting yourself. If they are not informed of difficulties they will simply see a delinquent account missing repayments; if you make an appointment to inform them of the situation they are usually more understanding. Be aware though, that they will still require repayment and that your debts will not simply vanish. You will still need to make some lifestyle adjustments in order free up the required cash to meet the repayment plan.
Once your debts are cleared or under control, you can then make a better decision about what to do with your disposable income. Planning a weekly or monthly budget will help and will help you keep in control of your daily balance. You will then be able to make a more informed decision as to whether an emergency or indulgence will be within your financial means or require additional funds.