Ten tips to improve your finances
Sadly, the finances of many have been affected during the COVID-19 pandemic and the true long-term effects on household wealth will take some time to become clear.
People in debt were more likely to to save money in response to a fall as the pandemic struck last year, according to the Bank of England. Almost 9 million people have been forced to borrow more due to COVID-19, according to The Money Charity.
Managing your money has never been more important than in the era of the pandemic. Here are eight tips on how to reduce your debt and come back in the dark.
Watch: Should I pay off my debts or save money during the pandemic?
1. Eliminate unnecessary expenses
Often times, we spend money without really thinking about it. How often do you buy coffee or subscribe to things you don’t even use? How many times do you go into a sale without realizing that you’ve spent more than you would have if the sale hadn’t happened?
Retailers want you to keep buying because their motivation is profit, not your financial stability. Resist the temptation to say yes to things you don’t need, and set your financial priorities so you don’t go over an appropriate budget.
Legendary investor and philanthropist Warren Buffett said it best: âDon’t keep what’s left after you’ve spent; spend what’s left after you’ve saved.
2. Open a savings account
Choosing to save or pay off debt depends on your financial situation.
âIn an ideal world, we recommend both, because what you don’t want to do is pay off your debt and then an emergency happens,â says Louise Higham, Certified Financial Planner and Director at Tilney Smith and Williamson.
She recommends looking at the income you have and dividing it: 90% for paying off debt and 10% for a savings account. Interest on debt is usually higher than interest on a savings account, which is why more money should be spent on paying down debt, but you don’t want to end up with no savings at all. Higham adds that it’s good to save at least 12 months of expenses.
Individual savings accounts (ISAs) allow you to save more because the bank contributes what you put in with tax-free interest. There are four main types: Cash ISAs, Stock & Equity ISAs, Innovative Finance ISAs, and Lifetime ISAs.
There are also other types of savings accounts. Contact your bank to find out more.
3. Avoid payday loans
Payday loans can seriously hurt your finances, as the astronomical interest will allow you to pay them off perpetually.
Higham says that although the industry is more regulated now, payday loans should still be avoided. They can affect your credit score, especially if you take them out regularly, which can make it more difficult to obtain traditional loans such as mortgages when you are in better financial health.
âWhat this shows any potential lender is that you are not on budget,â Higham says.
More and more data is emerging on how these loans are granted to clients, many of whom do not know the real costs. Hidden charges often arise when payments are late, in addition to interest. If you save as much as you can, you will have less need for loans like these.
4. Avoid relying on credit, especially if you know you’ll be behind on a bill.
As with the above, buying something with money you don’t have is dangerous. Being late on a credit card bill is a sure-fire way to stay in debt, so think twice before you buy if what you’re buying isn’t urgent.
Likewise, Buy It Now and Pay Later programs just kick the box down the road. Think about what will happen if you can not pay later.
âTry paying too much on minimum payments with credit cards so you can pay it off faster,â Higham explains.
“If you are going to use credit, make sure you have a clear structure in your mind that you are going to pay this.”
5. Monitor your financial situation regularly
Study your bank statements, receipts and every record of what goes in and out of your account. If you don’t have any financial knowledge, you won’t be able to manage your money. It can be uncomfortable, but it is a necessary step. Knowing what goes in and out of your account helps you stay disciplined.
If the above tips are not enough and your situation is more serious, there are still other options.
6. Debt Relief Program
Also known as the Breathing Space Scheme, the Debt Relief Program gives you 60 days during which no action can be taken against you. No interest or other charges can be added to your debts during this period either. This gives you a chance to settle your finances, but you will still have to pay off your debts after the 60 day deadline has passed. The plan is free if you request it but a debt counselor may charge you.
7. Debt management plans
This is where you and your creditors agree on a plan pay our debts, usually when:
Management plans can only be used to pay off “unsecured” debts, that is, those that are unsecured on your property.
Establishing a plan with your creditors can be done on your own or you can go through a licensed debt management company. But be aware that the second option is paid and that you will be making regular payments to the debt management company as well as to your creditors.
You can get more information from the Money Advice Service (soon Money Helper).
8. Debt Relief Order (DRO)
A scrutineer will release you from your debts after one year and creditors will not be able to get their money back from you without court permission. You may be eligible if you fall into the following categories:
Your debt is less than Â£ 30,000;
You have less than Â£ 75 per month of disposable income;
You have less than Â£ 2,000 in assets;
You do not own a vehicle worth at least Â£ 2,000;
You have lived or worked in England and Wales for the past 3 years;
You have not requested a DRO in the past 6 years.
Your scrutineer is added to the personal insolvency register and deleted three months after the end of the order. A scrutineer also stays on your credit report for 6 years. This is a public record.
9. Individual voluntary arrangements
Another way to pay off some or all of your debt is through an individual voluntary arrangement. An insolvency practitioner determines what you can afford to repay and how long the repayment lasts, based on details such as your assets, debts, income, and creditors.
The insolvency practitioner contacts your creditors and the IVA will begin if the creditors holding 75% of your debt agree to the plan. It would apply to all of your creditors, including those who disagreed, and prevent any of them from taking action against you.
There is usually a setup fee and a processing fee each time you make payments. So make sure you know how much it will cost you before the practitioner acts for you.
The IVA can be canceled by the insolvency practitioner if you don’t keep up with the repayments, and they can put you into bankruptcy.
The IVA will be added to the individual insolvency register. He was withdrawn three months after his end.
10. Debt cancellation
As mentioned earlier, unsecured debts can be written off, but you will need to pay off some of it. Go over your budget with your lender and a debt management consultant to see how much you can afford to repay.
In order for all debts to be completely written off, you must file for bankruptcy. This should be considered as a last resort as it may affect your job or future employment prospects.
With all of the options above, Higham stresses the importance of doing thorough research and verifying that any debt management consultants you speak to are regulated by the Financial Conduct Authority. Unregulated âadvisersâ can give you bad advice and get you into more debt.