The new year is often a time for reflection and setting new goals. Do you want to get better at budgeting, boost your savings, or change your habits around money? We've got some tips in our multi-step guide to help you get financially fit.
We encourage you to look through the steps to learn how you can become more financially fit and build better money habits. Knowing how to manage and budget your money well can make a huge impact on your life. It can also give you peace of mind knowing how you're spending your money.
It's important to take steps to improve your financial fitness that work for you, and reach out to us if you feel you need support or are struggling financially.
In this guide:
Step 1: Assess your current financial situation
Step 2: Pay off any high-interest debt
It can be hard to keep track of everything you’re spending, but having visibility over where you’re currently at can help you to budget better. Having a set budget can help you understand exactly what you're spending on and where to cut back. This can help you reach your financial goals easier.
Here’s how you can get started with your budget:
This may include things like your salary, any benefits or tax credits, or pension or savings income.
One way to do this would be to work out what you’ve spent over a typical three month period. Add it all together and divide that number by three. This would give you your average monthly spend, based on those three months. Make sure to include your essential spending like bills and any repayments, as well as your typical non-essential spending.
This will show you how much you spend on average and how much money, if any, you typically have left over each month.
If you find you’re struggling in your current financial situation, or would like some help with more budgeting techniques, you can read:
If you do have money left over after each month, you might want to get more out of it. You could:
Setting aside disposable income into a separate account to your main current account can help you keep track of how much you’re saving over time. This can also remove temptation to dip into money that you could use to grow your savings.
Ask yourself what it is that you want to save up for. It could be a holiday, new furniture, or a ‘sunny day’ fund for treats. Having an idea of what you want to save for and knowing how much you need to save can keep you more motivated and on track.
High-interest debt can be tricky to manage and pay off. If you have it, it might be taking up a large amount of your monthly outgoings. But if you can tackle it head on, you can build a better financial foundation for your future.
High-interest debt is debt with an interest rate of above average on the market. Anything above the Bank of England base rate can be considered high. But interest rates can be much higher – some credit cards can have interest rates of 25%.
Our top tip for paying off high-interest debt is to not bury your head in the sand. We know how overwhelming it can feel, but ignoring the debt will not make it go away. Help is always out there and it’s best to let your lenders know if you are struggling, as they may be able to offer you support.
Sticking to a plan to help pay off your high-interest debt is crucial, and there are a few strategies you could look at:
The way this method works is simple. You pay the minimum amount due on all of your credit cards and loans. Then, with any extra amount you can afford, you pay off the card or loan with the smallest balance first. Then you do this with the next smallest, and so on, until your debts have been paid in full. Paying off debts in this order can give you motivation and a sense of accomplishment as you go.
This method is the opposite of the ‘snowball’ method. You pay the minimum amount due on all of your credit cards and loans. Then, with any extra amount you can afford, you pay off the card or loan with the largest balance first. Then you do this with the next largest, and so on, until your debts have been paid in full. Paying down the debt that costs you the most first can be a good way to quickly feel the financial benefit.
You might be able to transfer your existing high-interest debt to a 0% balance transfer credit card. This could help you pay down your debt without interest charges mounting up. Remember to check the terms, as 0% balance transfer credit cards usually have a set period of time before the interest rate rises. Balance transfer cards may also include a fee to transfer your balance to them, so make sure you check this and factor in the cost.
Remember – you must still pay the minimum payment each month on all credit cards and loans you have.
It’s important to note that paying off your high-interest debt might not be a quick process. It can take time and dedication. It might help to start thinking about your financial goals before you have paid off your debt, as something to use as motivation along the way.
Take a look at Salena and Mark’s journeys to financial freedom, to see how they paid off their high-interest debts.
Salena, a 34 year old public services worker, and Mark, a 49 year old construction worker, were in very similar situations. They were both struggling with high-interest debt after their partners lost their jobs a few years back. They felt they had no other choice but to rely on multiple credit cards and personal loans so they could make ends meet.
A large chunk of their incomes were going on the debts because of the high interest, even after their partners found work again. The weight of the stress built up and both Salena and Mark decided to contact their banks to see if they could help.
It took a lot for them to reach out for support because they always felt so embarrassed about being in debt. But they both spoke with their banks and came up with a plan.
Salena transferred her largest existing high-interest debt from a credit card to a 0% balance transfer credit card. It had 0% interest for 24 months, which meant they were no longer paying interest on the debt each month. This left them with enough money to try the ‘snowball’ method, too. She focused on paying their smallest balance first, then the next smallest, and so on.
Salena wanted the debt to be paid off quicker, so she decided not to save in the process.
Having no emergency savings knocked them back a few times when unexpected things came up and they didn’t have savings to fall back on. But she knew when the debt was paid they would have created good habits to prepare for saving, like budgeting and putting money towards something monthly.
It often felt like the process was slow, but Salena always kept her end goal of owning their own home in her mind to stay focused. Each payment was a step closer.
Eighteen months later, all of their debts were paid off. Within another six months, they had saved up a couple of months’ worth of living expenses in their emergency fund. They were also finally working towards saving for a house deposit.
Like Salena, you might prefer to pay off your debts first before saving. Another option is to do like Mark did, and save alongside paying off his debts.
Mark had heard about the importance of having an emergency fund, despite his debt. Whilst he wanted to pay it all off as soon as possible, he decided to tackle both things at once. He realised that if he could even build a small emergency fund, it would stop him relying on credit cards for unexpected expenses, potentially pushing them further into debt.
Mark transferred his high-interest balances to a 0% balance transfer credit card. It had 0% interest for 24 months, which gave them some breathing room. He stuck to a strict budget, cutting down on non-essential spending. It felt tough at times because it was a slow process to pay off the debts whilst trying to save. But Mark kept his financial goals in mind constantly. He wanted to be free from money worries. Over time, he started building better habits and enjoyed seeing his savings increasing.
By the time the 0% APR period on his balance transfer credit card was coming to an end, he made the final payment on it. It was such a relief to know that the debt was gone. And they’d even managed to save £1000 into their emergency fund.
By saving while paying off debt, Mark had given himself a cushion to fall back on. And the habit of saving, even in small amounts, was a permanent part of their new financial routine.
It’s important to weigh up your options and make sure you choose and follow a plan that works for you when looking to pay off your high-interest debts.
Whether it’s an emergency fund or funding moments of joy, our Build your emergency fund page will talk you through how to get started building your savings.
Want to boost your savings without adding to them yourself? Or hoping to earn more on what you already save? Compound interest could help to grow your money over time. Find out more about what compound interest is and how it works on a savings account in our What is Compound Interest? page.
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