How to future proof your finances

It’s easy to feel overwhelmed when you’re struggling with debt, but help is available.

Find out what you can do to get on top - and stay on top - of your household bills.

Are you struggling to pay your bills?

You’re not alone; the number of people seeking debt advice continues to rise, with many struggling to pay basic household costs such as council tax and utility bills.

The debt charity Step Change estimates 4.6 million people have accumulated over £6bn in debt and arrears since the beginning of the coronavirus pandemic. This figure is likely to be even higher by the end of 2020.

It says 14.9m people - 29% of the adult population – have experienced a negative change of circumstance due to COVID-19, including unemployment or furlough.

Among this group, 7.1 million have fallen behind on essentials or borrowed to make ends meet, averaging £1,365 in arrears and £1,577 in debt per adult affected.

Although most debt is often triggered by an unexpected life event such as illness, bereavement, divorce, separation, or redundancy, Covid-19 will have made things worse for many people already in debt.

Phil Andrew, chief executive of StepChange urges anyone facing financial difficulty to seek help.

“What everyone should know is that if you’re facing debt problems you don’t need to try to cope alone.”

How to get yourself out of debt

The Money Advice Service estimates 22% of adults have less than £100 in savings. This makes them vulnerable to debt if they lose their job or if they have a mortgage and interest rates rise

The best way to deal with debt is do a financial audit, this sounds complicated but it’s not. It involves 5 simple steps you can take. These include:

  1. Reassessing your spending habits

  2. Switching to cash for a few months

  3. Paying down your mortgage and credit cards

  4. Building up your savings

  5. Seeking expert help

1. Reassess your spending habits

You need to cut down on non-essential spending. To do this, first make a list of everything you spend your money on.

How to save on the small stuff 

Small expenses can add up over time, so while your weekly coffee might not seem much, £3 a week adds up to £156 a year.

Shop around for insurance and utilities 

If you have not shopped around recently for utilities and insurance, then do so – you’ll be surprised how much you can save.

Why you should switch energy providers and shrink your bill

Shrink your mobile and broadband bills 

Make sure you are on the cheapest mobile phone contract possible. Phones and broadband are some of our biggest bills, but if you’ve reached the end of a 24-month phone contract you could switch to a SIM only deal and save yourself between £20 and £50 a month.

You won’t get an upgraded phone, but you could use the money you save to pay off your debt or mortgage more quickly. You can usually keep your own number, and just put the new SIM into your existing phone.

2. Switch to cash for a few months

Debt counsellors often suggest paying for things with cash, rather than cards, because it is a physical reminder of how much things cost.

If money is getting tight, work out what you can afford after you’ve paid for essential bills, and withdraw your weekly spending total in cash.

Having a dwindling pile of cash is a physical reminder that you have a limited amount of spending money. It may help you think twice before an impulse purchase or a “bargain”.

Avoid the temptation to spend 

Unsubscribe from emails that retailers send suggesting new clothes or gadgets. 

You should log out of online shopping accounts that enable you to buy with just one click or with an app on your smartphone to reduce the temptation to spend. 

You need to avoid anything that makes it easy to buy. This will give you time to assess whether what you are buying is for a “want’ or a “need”.

3. Pay down your mortgage and credit cards

The Bank of England has kept interest rates at 0.5%, although this could change after the UK leaves the European Union.

If you have managed to free up a bit of extra cash then it could be possible to overpay your mortgage each month. 

You’ll need to check first with your mortgage company to make sure you won’t be hit by any early repayment penalties. 

Also check whether your interest is calculated on a daily or monthly basis, so that you can pick the right time to pay in the extra money.

Reducing your mortgage cost is the most effective way to shock-proof your finances. 

It means that you’ll pay off your home loan a bit earlier and give yourself some slack if you’re struggling to pay in the future, for example if your income is reduced or you lose your job.

How to pay off your credit cards

Look at your most expensive credit card debt and pay that one off first. If possible, switching to a card with a zero-interest rate period – many now offer 30+ months interest free. 

Just make sure you have a plan to pay off the debt at the end of the term.

How to pay off credit card debt

4. Build up your savings

Money experts suggest that it’s a good idea to have cash equivalent to 3 months’ worth of household bills saved up in an easily-accessible savings account

That way, if you need a new car or money for house repairs, you won’t be forced to resort to an expensive, short-term loan. 

It also means that if you were to lose your job or suffer a relationship break-up, you’d be able to cope in the short to medium term.

Banks and building societies normally pass on any increase in the Bank of England base rate to borrowers but have been slower to pass on the benefits of the increase to savers.

You need to shop around for a savings account; a cash ISA for example, means you don’t pay tax on any of the money while it’s in the account, and you don’t have to pay any tax on the money you withdraw. 

5. Seek expert debt advice

If you are finding it hard to cope, even if you are not in serious debt, arrange to speak to a debt counsellor. They can help you get an impartial overview of how best to manage your money.

Try and seek help as early on as possible, although it is never too late to get advice on sorting out your financial problems.

If you don’t want to make a phone call or are not able to make a face to face consultation, you can still get advice via a webchat with one of the debt charities.

For more information on getting out of debt, read our in-depth debt guide

For tips on how to not get into debt in the first place, read our list of personal finance mistakes to avoid.

More information on getting out of debt

The Money Advice Service provides money guidance online and over the phone and can be contacted on 0800 138 7777 Monday to Friday 8am-6pm and Saturdays 9am -1pm. Information and guidance is also available on their website or via a webchat.

National Debtline provides free advice to individuals and businesses. It also enables people to discuss their issues via a webchat.

16 December 2020