Debt Prevention: How to successfully manage your finances

We’ve worked with our financial wellbeing partner, S & K Berry Associates, to provide top tips on how to prevent debt.

Did you know it takes over 26 years to pay off average credit card debt, if you only make the minimum payment per month? It’s no wonder, then, that 30% of people say they’re concerned about their level of debt.

So how can individuals improve their money management and prevent getting into debt?

  • Manage your expenditure

Everyone knows when payday is, right? Yet you probably spend money most days without really thinking about it. Make sure you know when money is leaving your account, planning effectively so you know when your cash is due to be replenished too. This will help you to manage what you’re spending, stopping to ask yourself “do I have the disposable cash for this?” before purchase.

A financial adviser such as S & K Berry Associates are able to offer detailed expenditure analysis to help you with this process. They will also be able to help you keep accurate logs of your accounts.

  • View saving as essential

You pay your bills every month, and make sure there’s enough for food shopping each week. Such spending is often classed as ‘essential’, with clothes or meals out next on the list. Saving should also be high on your priority list, rather than a ‘nice to have’ amount of surplus cash you might put into your savings account every few months.

As a general rule we tend to spend what we see. Try moving money into a ‘savings’ pot regularly, to remove it from being spent on non-essentials. Take an overview of your financial situation and the affordability of savings. Analyse your current circumstances and decide upon an appropriate amount for you to save each month.

Present Bias means people overvalue the ‘now’ and under value the ‘future’. This means many people overspend based on what they need currently without thinking about the future. This can ultimately lead to long-term debt.

Think about ‘future you’ and plan for them.

  • Keep track of your money

We’ve all experienced the end-of-the-month squeeze. It’s true that many of us will have to be mindful of spending too much at the end of every month, but keeping track of your spending should prevent this from happening.

Don’t fall into the habit of going into overdraft or taking out unnecessary loans. Try to manage your money throughout the month instead so you aren’t left with little resource in the last week.

  • Make spending difficult

Choose an account that’s easy to put money into, but difficult to take money out of. Have accounts with different levels of access, so you aren’t tempted to dip your hand into your savings.

  • The psychology of spending

Mental Accounting means the value we place on money, based on what we’re buying and how we’re buying it. For example, people tend to spend more when they use credit cards as opposed to cash. A recent windfall of money can be considered disposable income, when it could indeed be put into savings instead.

In order to avoid debt, be aware of your spending habits and change your tactics to avoid spending too much. For example, take a specific amount of cash out with you and leave the credit card at home if you’re going on a night out or a shopping spree.

You can also change your spending habits by ingraining a proactive thought process instead of a reactive one. Think ahead and plan your spending. If you wait until you need money for essentials, and find you don’t have enough money left, then you may need to turn to overdrafts or credit cards.

  • The difference between illiquid and liquid assets

An illiquid asset is something that can’t be easily sold or exchanged, whereas a liquid asset is something that can be conveniently and quickly converted to cash. Most people accumulate illiquid assets far more than liquid – meaning it’s more likely for people to turn to credit cards or loans if they face short-term cash flow problems.

Focus your savings efforts on liquid savings. Invest in emergency funds or savings accounts, enabling you to turn to these on a rainy day rather than accumulating debt.

  • Understand the difference between good and bad debt

Good debt is an investment that’s likely to grow in value. For example, student loans or mortgages can be considered good debt (when used in the right way).

Bad debt is likely to lose its value and can also carry a high interest rate. Credit card debt or cash advance loans are examples of bad debt.

Understanding the difference between these two types of debt is key. Try to avoid bad debt wherever possible, whilst recognising that in the long-term good debt can actually be financially beneficial.

What happens if you are in debt?

Try to pay back your debt as quickly as possible. You could be subject to an ‘early repayment fee’, where interest may be added that your lender may have missed out on. Before overpaying, make sure you are able to pay this fee.

If you do get into bad debt, then it’s important to turn to the experts as soon as possible. There’s no shame in asking for professional help, as this will help you get our of debt quicker. Approach charities and finance professionals who specialise in debt to help you.

Can we help to improve your financial wellbeing?

In partnership with S & K Berry Associates, we are offering our customers and their employees’ advice on finance management. This includes seminars and expert advice on hand should you need it.

For more information, please contact the We Are Wellbeing team.

Please be aware this is not financial advice. Any points made are guidance on possible ways to avoid debt and is for information purposes only. Please seek a professional for advice based on your personal circumstances.

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