Dealing with Debt

Sorting out your personal finances can be a daunting task but is something we all need to tackle sooner rather than later. Many of us lived to excess and perhaps borrowed too much during the Celtic Tiger years and are now overwhelmed with debt. In this article I am going to try to give some pointers on where to start when dealing with debt.

1. Do you know how much debt you have?

First of all, you've got to establish how much trouble you're in. Set up a filing system that works for you, and start a simple spreadsheet that shows exactly what you owe, and to who. This should include Mortgage, loans, credit cards, outstanding bills ect.

Make sure you calculate your total debt, both including and excluding your mortgage. Once you've taken these first crucial steps, you'll be able to work out whether you should be saving or paying off debt.

If you have many debts, it usually makes financial sense for you to clear them before you start saving. This is because the interest you pay on your debt is probably greater than the interest you would earn on any savings you have.

2. Do you know precisely how much your debt is costing you?

The cost of each of your debts is the rate of interest you're paying on them. Once you've established how much each of your debts costs, see if you can rework them so you're paying as low a rate of interest as possible. One way of doing this is to take out a 0% balance transfer card and transfer some of your debts onto it.

Once you've minimized the interest you're paying, the quickest way to clear your debts is to snowball them. First work out your most expensive debt (highest interest rate) and then pay as much to this as possible while keeping up the minimum payments on everything else. Slowly but surely you should be able to get your debts paid off one by one.

3. Are you prepared for the unexpected?

Everyone should have a savings cushion equivalent to at least three months' wages, to deal with unexpected costs and emergencies. However in the current environment it can be hard to build up this savings cushion.

If you lost your job tomorrow, how long would you be able to last before you resorted to credit cards and high-interest loans? If you've managed to pay off your debts - but you haven't started saving yet - it's crucial you start straight away!

If you are paying off debts and have no savings then it might be worthwhile considering taking out a payment protection policy to at least cover your mortgage repayments in the event of an accident, sickness or redundancy.

Preparing for the unexpected also means being properly insured. If you have dependents, you should also think about taking out life insurance to provide support for them if the worst happens. It's not a pleasant subject to think about, but nor is the prospect of your loved ones being unable to cope after you're gone.

However despite the need for insurance if you are in debt the most important thing is to tackle your debt head on and get out of debt as quickly as possible. Easier said than done, I know, however if you have a plan and stick to it you will be out of debt in no time.

If you have some equity in your home it may be worth while thinking about a remortgage to clear your debts and get back on track.

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