Debt management & the snowball plan
When it comes to managing your debt, the first and most important rule to remember is: don’t panic.
There are millions of people struggling financially in the UK, and the country itself is in a massive amount of debt. What you need to do is take charge, take control, and put a clear plan in place to alleviate your stress.
Step 1: Get organised
It’s very easy to feel overwhelmed when in debt, it’s all-encompassing. The fact is: you owe money. There’s no way around it, but don’t panic. Try to take a pragmatic approach. When you get organised, you have clarity, and that will help you feel more in control when it often seems like there’s no way out of your situation. That should diminish the feeling of panic.
Write a list of what you owe and who you owe it to – a lot of times people just don’t know this information. Here’s a very simple spreadsheet to help you with this.
At the same time, organise your bills: look at what’s coming in and what’s going out each month.
Step 2: Make sure there’s more coming in than going out
There’s no way around this one. If you can’t find any way to increase your income, then you have to cut your expenses down – these are the only two things you can do. This can be really tough, but it’s essential to getting you to financial freedom. And don’t take any more credit or debt out.
Step 3: The snowball plan
This is the best way to pay off what you owe, giving you control over your situation. The snowball plan focuses on paying off your debts one by one, the smallest first. Typically, people in debt try to pay off the highest interest rate debt first, and then go down to the next lowest one and so on. But, especially if your highest interest rate debt is the largest balance, it will take you a long time to pay it off and you’ll lose momentum. Psychologically, this is much harder on you.
By paying the smallest debt off first, you build momentum. You get a quick win: ‘One debt paid off already!’. Once that’s done, you move onto the second smallest debt, and put everything you have available into that one, and continue working from the smallest debt to the biggest one in order. Ignore the interest rates altogether – you need the psychological momentum, which makes you more engaged in clearing your debt. You might get more creative, finding items to sell you no longer need or doing a little overtime just to make that bit more of a difference. Don’t underestimate the psychology here, it’s massive.
I’m not a believer in debt consolidation, because it removes momentum if you just have one giant debt mountain to climb. Think smallest first and you’ll start to find yourself looking up, not down.
Once you’re in control, I have a bank account system that will help you stay there. I use this system personally, and so do virtually all my wealth management clients, some of which have a seven-figure income. It’s brilliant for taking charge of your finances – start using it NOW.