Saving Tips While Trying To Pay Off Debt

Hi everyone :wave:

I thought I would come on here to ask for some money/debt management advice.

I’ve made a lot of mistakes in the past, especially when it comes to finances. From taking out multiple credit cards at a young age and relying on payday loans :cold_sweat:

Managing money has always been difficult for me as I have a very impulsive personality. My pride is probably what’s gotten me in this pickle as I’m normally too ashamed to turn to friends and family, so resort to taking out expensive loans when I’m in need of some extra cash.

Saving is extremely hard for me even without the added pressure of thinking of debt. So I was wondering if anyone had any tips on how to save whilst trying to pay off debt?

I’m sorting out my finances now by budgeting better and making sacrifices. I’ve moved back to my family home and I don’t own a car. But I’m stuck in a bit of a rut as I’m unsure where this extra money should go. Do I save some for a rainy day, distribute the money evenly to debtors or just pay off one debt at a time and then start saving once I’m debt free?

Any advice would be appreciated as I’m just winging it right now :joy:

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Debts first is always the best idea. If you’re paying off credit cards then you’ll be clearing money off them which can cover an emergency if needed (hopefully you won’t need it though)
I prefer paying one debt at a time as psychologically you can see you’re making progress

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pay off the most expensive debt first - why save for a rainy day earning relatively no interest when your debts are accruing at 15-20% ( ? ) a year

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Yes - don’t. Get rid of the most expensive debt first and one by one lose the others - only then start saving. There is no point being in debt longer than you need to because you want to save.

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Personally, I would recommend you seek professional advice:

https://www.moneyadviceservice.org.uk/en/tools/debt-advice-locator

My first tip is to live on a fixed budget and stick to it. I was always in my overdraft by hundreds until I worked this out. After all my essential bills are removed, I live on £70 per week which includes buying food and transport. This enabled me to have a decent surplus every month instead of spending every last penny.

My second tip is to have a separate bills account from spending account (although you will have access to the internal Committed Spending pot which might work for this). Each week money transfers from one to the other.

Thirdly, as others state if your saving interest rate is lower than your debt interest rate, it is best to pay that off first. My only exception to that is if you have a Lifetime ISA as the 25% bonus most likely will exceed your highest debt interest .

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The specifics of your situation are very important, for example if you have a lot of high interest debt that you’re struggling to service you would have different options if you have a small amount of low interest debt. There are some fantastic resources available to you regardless of where you stand, StepChange is a charity that will talk to you to learn about your situation and then help you explore your options if you don’t want to talk about it on a public forum!

An Emergency Fund (“some for a rainy day”) is something very personal to you, if you are in a position where you have the support of your family and you’re able to live rent free it’s very possible that you do not need much of an emergency fund at all, and you can use that money to reduce the long term costs of your debts by repaying them sooner. The question I’d ask myself is “how much cash do I need available to ensure that if something unexpected does happen that I don’t find myself falling back into old habits?”. If you don’t have rent, don’t have a car, and have the support of your family, I imagine that amount is very low and therefore you can safely focus on servicing your debts once you have a few hundred pounds saved.

There are options like debt consolidation loans, or taking out a balance transfer credit card that has a 0% introductory period, and they can be a very good option to minimise the costs incurred by carrying your debts however it’s very very easy to consolidate your debts and then unintentionally use that as an opportunity to slip back into bad habits. Essentially, you have to ask yourself whether or not you truly feel that you would be able to control your impulsive spending and whether or not the interest you’re paying now is “worth” paying because of the metaphorical fire it lights under you.

Another big risk you face is falling back into old habits once your debt is paid off, you may spend months or years cutting back and then the moment your debt is paid off you feel that you have finally earned the right to treat yourself… and that can be a very slippery slope back into the same situation, that is very common. The best way to avoid this is to focus not just on paying off your loans, but building a positive attitude towards money and do not punish yourself: you don’t need to live off of bread and water while you’re clearing your debts. The goal should be something like, “on the day my debt is paid off I should feel relieved and proud but it should not change how I feel about my spending, I will continue with the responsible money management I’ve learned over the last months/years and my day to day life will be unchanged”.

For me personally, the biggest change in my understanding of money was when I learned that (bold because of how important this is) budgeting is for everybody, whether you have a lot of money or a little. Many people find themselves in financial crisis and implement a budget and manage to solve their crisis and reward themselves by abandoning their budget (“I’m fine now, I don’t need a budget!”) and then before they know it they’re in crisis again.

I think a lot of people find budgeting stressful and think of it as a punishment because budgeting has been mischaracterised. My recommended method of budgeting is the Envelope method, which you can implement using physical envelopes, Monzo pots, using a spreadsheet or (my personal recommendation) the You Need A Budget app. The Envelope method means when income arrives (e.g: salary) you immediately allocate all of it to categories, e.g: bills, food, fun, debt, savings. During the month if things change (e.g: bills are higher than usual) you move money from another envelope (e.g: fun) to the envelope that needs it, which means you have the flexibility to deal with life – life is full of curveballs. Even if you don’t want to use YNAB, their website has some really helpful information about the method and they do online classes too.

A fantastic resource for personal finance is Money Saving Expert, Martin Lewis is a saint. There’s so much information available on their site covering every aspect of personal finance, including Debt Solutions.

Also it’s worth remembering that you’re not alone, so many people are drowning in debt but you’d never know. The difference is you’ve taken the difficult first step towards addressing it, and that’s something to be very proud of. Don’t think of this as just the start of getting debt free, think of this as the start of setting yourself up for a successful financial future: the habits you build now will pay dividends for the rest of your life. You’ll look back in a decade and have so much pride in what you’ve achieved.

Edit: this comment evolved into more than just saving tips, but it’s all interlinked, forgive me.

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I recommend this flowchart to everyone :slight_smile:

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As others have said, a plan to pay off your debts and get yourself on a better financial footing is 100% individual, but hopefully hearing the experiences of others will help you feel more confident that you’ll achieve your goals.

Over the years I’ve made a fair few appalling financial decisions that I’m still paying for now, but the difference is that I now have a plan to repair those mistakes and avoid making them again.

One of the most important things I think I did was accept that I wasn’t going to switch things around in a short timescale - it’s a marathon. There’ll be ups and downs as well as times it just feels hopeless. You’ve got to keep reminding yourself that you’ve got a plan and you’ll get there eventually.

Personally I’m finding that ignoring the interest rate and rolling up my debts smallest to largest is working for me. When I was trying to focus on the most expensive debt first I often felt hopeless and like I wasn’t making any progress - by just concentrating on the smallest debt first I’ve found my motivation is staying fairly high and I’m staying on track (albeit a track that’s longer than using the traditional snowball method!)

As for saving - I subscribe to the theory that I’m better factoring saving for emergencies into my budget rather than pushing all my available cash into paying off debt. This is based on the fact that if I have no emergency cash and an emergency happens (which it almost inevitably will) I’ll need to use a credit card, feel hopeless because I’m using a credit card that I’ve shown I can’t be responsible with, and the negative cycle starts again… Case in point:

My car failed it’s MOT recently and I need it for work so being off the road isn’t an option. The repair wasn’t really that expensive (£100) but in previous years I’d have stuck it on a credit card and essentially forgot about it. This year I used some of my (admittedly small) emergency fund so that my debt repayment plan remained completely on course. It’s a small victory, but a victory nonetheless.

My method might not be the textbook “best” method, but so far it’s working for me.

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The best thing is to talk about it.
As others mention - budgeting is key. It needs to be your sole focus.

Think not what I want but what I need.

A coffee at Starbucks is not a need. Pret is also not a need.
Once the budget is established then you can start looking at the debt.
It really is important that you budget properly - don’t leave yourself short.
This will allow you to see how much you can clear off each month. Paying an extra £20-30 a month can and will make a difference- not this month or next but over 5 years it will.
The best cost saving approach is paying the highest APR first.

There are 4 options with debt
*self budget to pay off
*debt management plan
*IVA
*bankruptcy

I’ve listed them in the order that they will impact you.

N.B No debt no matter how high is always able to be resolved. Please don’t ever contemplate life changing action there are always options.

Citizens advice are probably the best people for anyone to speak to.

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I can relate to this and have found myself in a lot of debt on a number of occasions. I’ve cleared it and paid it off, apparently in cycles.

There seems to be two schools of thought when it comes to clearing debt --either attack the highest interest debts first, or the smallest ones and use the debt snowball method. I personally prefer the latter as it does help you to feel as though you are making progress with each smaller debt that you clear, whilst also freeing up disposable income. It’s worth checking out Dave Ramsey’s Total Money Makeover from the library. I found it pretty helpful.

The next thing then is to make saving a habit. Whilst the interest rate on your savings is unlikely to compare relative to the interest on debt, putting money aside gives you piece of mind should any sudden disaster happen, especially if you can deal with it with cash and not resort to using a credit card and knocking yourself backwards. It also means that you can enjoy your life a little, whilst also making inroads on debt. If you can afford to put 10% away as a buffer and for some fun, you’ll hopefully stick to your plan a little better. £500-£1000 locked away for emergencies, then after that, money for living a little.

Yes, you can throw everything at your debts, but at some point, if you are anything like me you’ll find yourself splurging at low points. Having a savings pot for things you’d like to have in the future can be quite liberating. When the debt is gone, the habit of saving will hopefully be ingrained and you can start hurling money at houses and retirement.

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This is amazing! Thank you so much for taking the time out to respond with these wonderful tips. I really appreciate it :blush:

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Nice one. A small victory to treasure