How to Avoid Being Overwhelmed with Debt
These days, people in the UK rely on lines of credit more than ever. This is reflected in the rewards offered by credit card companies, too. You can get cash back on purchases, airline miles, and plenty of perks – all for paying with plastic at the checkout line. Although it’s certainly tempting, it’s best to use credit carefully to avoid being overwhelmed with debt.
Determining Your Disposable Income
Take a minute to think about the amount of money your family earns in a month. Then, sit down with a piece of paper and a pencil and write down all your necessary monthly expenses and bills. These include:
- Rent or mortgage payments;
- Utility payments (natural gas and/or electricity);
- Health, car, life, and home insurance;
- Monthly food costs;
- Medical costs, including those for prescription medications;
- Monthly cellphone bills;
- Television bills;
- Internet access costs;
- Car payments;
- Credit card bills;
- Fuel and car maintenance costs; and
- Clothing expenses (including dry cleaning, washing, etc.).
Now, add up all your monthly expenses and bills and subtract it from your monthly income. The amount left over is your disposable income. Ideally, your expenses should come to no more than 70% of your total monthly income. If they are more than 70%, you don’t have enough disposable income – and this can hurt you in the long run. Not having disposable income is what often leads to unmanageable debt. Families find themselves borrowing more than they can afford to repay to cover unexpected expenses or make other purchases.
Savings Are Necessary
One of the best things you can do to help prevent being buried in debt is to create a “nest egg” or “emergency fund” that can help you when the unexpected happens. Rather than considering your savings part of your disposable income, figure them into your list of necessary expenses each month. You should aim to save at least 10% of your income each month at a bare minimum. However, it’s even better if you can follow the 50/30/20 rule. This means that 50% of your income should go to essentials like housing and food, 30% should go to lifestyle choices like television access and dining out, and another 20% should go into savings each month.
How to Prevent Debt
Now that you’ve followed the above steps and determined how much disposable income you really have, it’s time to decide whether you need to make some changes. If you’re spending more than 70% of your income on monthly bills before you’re putting anything into savings, you should look at where you can cut back on your bills. For example, you might be able to save £30 or more by switching to a slower internet speed, and you can save up to £100 by trading expensive cable or satellite television for streaming services like Netflix. Try grocery shopping on a budget, too, and cut back on cellphone data to save even more.
Part of keeping your head above water when it comes to debt is spending wisely, but a big chunk of it comes from learning how to budget and allocate your monthly income appropriately. Cutting back now might seem difficult, but if you can avoid debt and the interest rates that come along with it, you’ll be far better off in the long run.