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What to do if you are
In Debt

How to get out of debt. How to solve the terrible problem of owing a lot of money and being in debt.

Take it calmly and read this helpful advice on how to solve your debt problem. It's no fun owing a lot of money to people, especially if they expect to be paid interest on it, and it's embarrassing when they ask to be paid back. Sometimes it is a terrible worry situation where it seems to be that you're getting further into debt and there seems no end to it. But there ARE answers. Just don't expect miracles. What I'm proposing is a logical, rational approach which will eventually crack the problem. I've seen this lots of times with a lot of people, and I have some good business sense about it.

The stuff on this page has to be thought about carefully, as this is a serious matter with a practical solution.

The key feature of the problem of being in debt is that more money goes out than comes in. It sounds simple, but if you are spending more money each week than you are paid each week, then you end up with less and less money all the time, which then causes having a negative balance, which means being in debt.

In contrast, supposing you have some savings in the bank, you have a positive balance. If you can make sure that you have more money coming in each week than you spend, then the amount of money you have increases all the time.

The trick is to go from being in debt to having a positive balance.

(The same technique works to get you a positive balance (savings) even if you are perpetually skint, hard up, penniless, etc. You might not be in debt in a real sense, but your persistent poverty is like a "virtual debt" and its solutions are very similar).

The first thing to do is to be able to find out what your balance is. To do this: Add up all your savings accounts (debts count as negative). The total is your current balance. A negative balance is debt, and a positive balance is savings. The zero point to measure against is true zero, not your Credit Limit!

Make a note of your current balance now, and today's date. In in a few months' time you can test the balance again, and see if it's got better or worse.

Now the interesting bit, the accounting! (This is traditionally done on the back of an envelope). Make a list of all your outgoings, and another list of all your income. These should be done in a consistent way, for example "per month" or "per week". You have to be honest with yourself in this, so if you spend £2 on the Lottery each week, that's got to be listed. Whatever you spend in a typical week goes on the list. Whatever income you have goes in the other list.

Here's a made up pair of lists so you can see the idea:

SPENDING (£/week)        INCOME (£/week)
Food 30   Dole 150
Cigarettes 20   wheeler-dealing 50
Mobile phone 30   Winnings on the dogs 10
Rent 60  
TV licence 3  
Electric 8  
Heating 4  
Take-aways 15  
Credit card interest 20  
Satellite TV 10  
Internet 2  
Bets on the Dogs 20  
Insurance 3  
Holiday 10  
Christmas 5  
Total ...   Total ...  
Note: This list is fictional! It is not MY expenses as someone mistakenly supposed. If it were mine it would be very very different.

Now look, this is just a made up list, just as an example to show the way it's done. Your expenses and income are probably quite different to this! But, you make your own list and include everything. It's a practical approach, and it's worth doing.

To get everything measured by the same rule, you need to put things such as "Summer Holiday" and "Christmas" which happen on a yearly basis, divided out to fit them into the calculation. Christmas expenses divide by 52 to express them as a weekly, rather than yearly, amount. When counting "interest", only put the amount of interest, not the payment back of any debt.

Then you add the totals up.

If you want to make a thorough job of this financial calculation, so you don't miss anything, I've compiled an Income and Expenses Checklist which may help.

It is interesting! The totals add up and it's clear whether you are spending more than you are receiving, or spending less than you are receiving.

If you are in debt, the chances are that you are spending more than you are receiving. So now, what to do about it:

Look at the income list and see if there's anything that can be increased or improved.

Look at the expenditure list and see if there's anything that can be reduced, anything that can be done without. Don't give up food! Giving up smoking is a possibility. Don't give up the Internet, but reducing the amount spent on phone calls is a possibility. But it's not for me to tell you what you should or should not spend. Take a look at your own list of spending and see what you can do without, and what you can reduce.

It's then possible to come up with a plan of adjusted lifestyle so life is still almost as much fun but without spending so much money. Can you do without spending money on some of the things in the list? Having created a new list by making adjustments, you then put the plan into effect in life. This might or might not be easy, according to how hard a task it is, but it's worthwhile in the end, to get out of debt.

A few months later, you can do another test on your current balance and see if it's improved. If you've done the adding up and carried out the plan, it's very likely to have improved!

Month-on-month, year-on-year, your balance should improve. When you have a positive balance, banks will pay you interest on your savings (savings accounts) rather than expecting you to pay interest on debts and loans. This is something which is worth looking forward to!

The extent to which you are in debt or in a positive financial situation is not luck, but a result of the facts of the mathematics, and it is possible to use logical planning to resolve the situation. An extreme example of this is Direct Drive, which is not for the everyone, and not for the faint-hearted!

Other positive facts: It is possible to set up a small scale business without spending huge amounts to set it up. See How to Run a Business. Also, if you are currently borrowing money at a high interest rate, you may consider shopping around for a more reasonable rate of interest. It's important to make sure that any loans you take out are better than the ones you have at present, and in any event you must be able to pay them back!Cut up credit card! Be careful. Shop around. See loans. It's often much better to pay for a consolidation loan than to continue to pay a credit card, as the interest rates on credit cards are usually much higher. It's cheaper to own a secondhand tv than it is to rent. And it's cheaper to eat a can of beans on toast than a fast food take-away. These are just guidelines and examples.

It's interesting to work the figures out Per Year especially for the expenses, as it amazing how big some of these things are! Also, it is interesting to notice that this business of adding up the figures "on the back of an envelope" has now been brought up to date with a system called Mvelopes. You can get this software download now if you like. Mvelopes has now returned! Welcome back! Also, The Finance Facility would like to be included in a similar style. Also, Bills.com is another useful site with useful software tools to help manage your finances. Worth a look into.

Your own financial affairs will take closer examination, and only you can do it. The fact is that there are practical answers, and they are there to be found.

Zyra is not an official financial adviser, doesn't offer official personal financial advice, and is not regulated by the FSA! The stuff on this page is based on the teachings of Charles Dickens* (who also wasn't regulated by the FSA) and on good financial sense as experienced by an Internet entrepreneur and a financial success!

Professional Debt Help and Debt Management is recommended and also available by contacting the Debt Advice Desk or the Debt Solutions Phone 0845 6185331. Good Luck! I hope you get it all sorted out.

Also, if you're running your own business and you're having problems, you could see if those salvagers of business Regency Holdings can help.

* Charles Dickens quote, said by Wilkins Micawber in the book "David Copperfield" is "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery". As the book was written in 1850, the currency is pre-decimal British. This, and inflation, may make the quote look odd, but the spirit of it is still correct. If your expenses are lower than your income, you have a positive balance, and should therefore be happy. In contrast, if your expenses exceed your income, you could be in for some trouble. In case you're interested, an income of twenty pounds sterling was a reasonable amount in 1850. Expenses of 19 pounds, 19 shillings, and sixpence, would be sixpence less, or an eighth of a percent less. Expenses of 20 pounds, 0 shillings, and sixpence, would be sixpence more, or an eighth of a percent more. Adjusting for inflation, it's like saying "Annual income £20000, annual expenditure £19975, result happiness. Annual income £20000, annual expenditure £20025, result misery". Notice how close together those amounts are.

Be wary of inflation rates quoted online. Some are lower than the real rate and some are much higher. You have to look at how much people were paid and how much their stuff cost. Additionally, in my opinion, modern inflation figures are fudged for political reasons.