How to manage your credit card debt
It’s that time of year when credit card debt loom large – and for many, that means worries about their finances. Recent research showed that people take on average until May to pay off their Christmas.
But by definition, if you’re ready and willing to do something about your debt this year, then you’re not average – the majority of people do not change how they manage their finances.
I use an acronym, PSAR, to represent the steps you need to get on top of your money management in 2019. It stands for Psychology, which is where it all begins; Strategy, so you have a plan to follow to get debt-free; Action, doing something about it; and Review, because this is about changing your habits not just once, but consistently.
If you start anything feeling like you’re unlikely to succeed, then you’re setting yourself up for failure. If you play sport and you begin a game thinking you can’t win it, then your shoulders go down and you will end up losing.
The same is true of our debts. If you think ‘It’s too hard, I can’t do it’, then you’re not going to get back into the black.
Start by looking at your physiology, because that’s the quickest way to change your psychology. If you exercise or play with your kids, you feel good because you’re moving your body: motion creates emotion.
So when you’re thinking about your debts, straighten your stance and hold your head up high. Move your body – walk, run or exercise. You need to believe, without any doubt, that you can pay your debt off. Visualise being debt-free and how you will feel.
On my website members area there’s an audio exercise to help you focus your mind on making better financial decisions. Call it brain training, meditation, whatever you want to call it – but listen to it daily and you’ll see results.
I’m a big fan of the Snowball System. Write down all your credit card balances and list them in order from smallest to largest. Find out what the interest rate on all of them is, and get the lowest interest rate possible on all of them (I’m not a big believer in consolidating all your debts, because of the psychology mentioned above;).
The aim of the Snowball System is to take all your surplus money – your snowball – and pay off the smallest balance first; not the one with the highest interest rate, the one with the lowest balance. Once that’s gone, move onto the next, then the next, always applying your snowball to the lowest balance.
Why? Because when you’re paying off your debts, you need some wins along the way to keep you motivated and engaged. That comes back to psychology!
Then, you need to look at three things: your assets, income and expenditure.
Do you have any assets or savings you can use to repay your debts down? Don’t deplete any savings completely, you should always keep £1,000 in an emergency reserve fund, but otherwise you should be using any assets to pay down your debt.
Next is your income. Can you earn more money? If you can’t, or you don’t want to take a second job, it’s time to get creative. Lots of us got Christmas presents we perhaps don’t want or need, so consider selling those items and any others in your home that you don’t use. Go through your home and get excited about making an inventory of things you can sell online.
Think how you can maximise your income opportunities and consider options such as renting spare rooms out using sites like Airbnb, dog or house sitting or selling your skills online using consultancy sites.
Finally, make sure you get paid, where you can, with any spending you do online using sites like topcashback.co.uk and quidco.com and get voucher discounts on sites like joinhoney.com, vouchercodes and vouchercloud.
The third step is your expenditure. This is where you need the Bank Accounts System which automates your money as much as possible, taking emotion out of everyday financial decisions.
- Set up two bank accounts, one for bills and another for personal spending (more can be used for other longer term expenses).
- Arrange ALL your regular payments to come out of your bills account – which is also where you have your salary paid. Go through each payment and ask yourself three things: do I need this, do I want this, can I get it cheaper elsewhere? You might be surprised at how much you can save, from TV packages to utilities to using a refillable water bottle.
- Put some Wednesday WAM into your life: WAM is your weekly WalkAbout Money, and it pays for all your variable spending and fun: drinks, coffee, haircuts and so on. Work out how much you want (or have) to spend in a month after your outgoings, divide it by four, and you’ll get your weekly WAM.
- Set up a weekly payment for this amount from your bills account to your spending account. Set it for a Wednesday, so you don’t have too long to wait after the weekend.
- Your WAM is your weekly allowance; it’s finite. DON’T dip into your bills account for more, it’s not too long to wait for next Wednesday!
This system gives you boundaries that stop you overstretching: if you can’t afford something, save a little of your WAM each week until you can. Don’t’ use your credit cards! The Bank Accounts System works for everyone from those on low income through to very high net worth individuals, and it will work for you too.
If you can’t start acting on your strategy right now, then put a note in your diary or calendar to sit down and review your finances. Don’t reschedule it, no matter what: nobody is more important than you. Taking action is the key to any success, those who do, are the envy of the many who purely watch.
Reviews need to be planned: again, put a note in your calendar and schedule time to review. It won’t happen unless you make it happen. Reviews help you keep on track, and they’re an important part of the process.
You won’t get fit by going to the gym once, and you won’t get financially fit by looking at your finances once either, it’s a process.
Is getting out of debt easy? No, of course it isn’t, but it’s straight forward. You CAN do it, by following these steps. Imagine how you’ll feel when you get debt-free, and use that feeling to drive your actions.