According to TopCashback, over 5 million adults in the UK live above their means, which means they spend more money than they earn. This is a surefire way to ruin your finances, credit score, and quality of life.
Yet, while some people do this intentionally, the majority are forced into this situation by lifestyle changes outside of their control, such as unexpected expenses, job loss, a sudden increase in living costs, and a poor understanding of finances.
But how do you pull things back when you have more money going out than coming in, and how do you understand your fantasies to get a better view of what is going on and what you need to be paying for?
Understand Your Finances
The first step to regaining control is to review all of your finances with a fine-toothed comb.
Start with every single penny you have coming in, and write down how much it is, when you receive it and what it is for. Then, you need to list all of your essential outgoings, such as your rent or mortgage, utility bills, insurance, food costs, council tax, etc. These are the expenses that are necessary for your basic needs and living conditions.
Once you have this, you need to list all your other outgoings that aren’t essential, such as streaming services, subscriptions, gym memberships, etc., and calculate what is coming vs. what is going out.
Lastly, list your everyday spending habits and purchases. Do you order takeout frequently? Or are you a boredom shopper? Do you grab a coffee on the way to work or head into the shop on your way past for drinks and snacks for your trips out?
Understanding your personal finances, how often you receive money, and when things need to be paid is the first step to getting back on track. This knowledge empowers you to make informed decisions, putting you in control of your financial situation. This is step one to getting the right information.
Cut Out Non Essential Payments
This is where you need to make hard decisions, and it won’t be easy. But you need to address how you spend money and trim the fat for non-essential payments to help you bring your outgoings in line with your income or less.
Do you really need four TV and film streaming services? Or can you cut down to one or two and rotate between them on a monthly basis so you don’t miss out? Can you reduce your gym membership if you don’t go frequently, switch to a cheaper gym, or even cancel it altogether if you’re not going?
Start with frivolous payments, spur-of-the-moment spending, etc., and then work through regular payments and outgoings to see where you can cut things down and save some money. Each cutback is a step towards financial stability, a reason to be proud and motivated.
Address Your Financial Commitments
This includes things like your mortgage, utility bills, insurance, loans, credit cards, etc. Addressing these commitments and being responsible and proactive in managing your finances is crucial. If payments are eating you alive and leaving nothing left, it might be time to get free debt advice or talk to creditors about repayment plans or freezing interest.
It’s important that you continue making payments until you have a suitable arrangement in place or have spoken to your creditors.
For some people, a consolidation loan might be a good option. You take out one loan to pay off all other loans and credit cards, leaving you with a manageable monthly payment. Or you might find you need to enter a debt management program, IVA, or other debt help services that let you manage your bills.
In addition to this, check when your contracts end for things like TV packages with Virgin, Sky, or BT, when car payments are due to end, insurance premiums are up for renewal, or anything else that can give you a timeline for when you can lower payments, eliminate them, or negotiate a new deal.
Increase Your Income
This isn’t always possible for everyone, but if you can look into creating an extra income, it might be a good idea to do so now—even if it’s only temporary—to pay off some bills or get out of debt.
There are many easy and complex ways to make money, and what works for one might not be suitable for another, but it’s worth considering your options to increase your income so that you can afford everything you have going out.
One good option many people have taken up is becoming a delivery driver to earn enough money to pay off debts or start a savings pot. Others might look at selling old items to cover the purchase of new ones. Other options can include things like checking if you’re entitled to compensation from mis-sold financial products such as PCP Refunds or being misled by a mortgage or loan. If you qualify, they can provide a nice lump sum payment that you can use to pay off debts, put toward a big purchase like a car or holiday or put into a rainy day fund.
Become Financially Literate
Lastly, becoming financially literate is a great way to help you avoid slipping back into old habits. Financial literacy is about more than simply living within your means; it’s about understanding the impact of finances, what your responsibilities are, decoding APR, knowing what a good deal is, and how to balance a budget. It’s about understanding financial concepts and principles so that you can make better, more informed decisions now and in the future so you can be as financially healthy as possible.
You can self-learn using online resources and blogs, or you can take courses to brush up on your skills and knowledge.
Improving your finances is seldom easy, but it’s always necessary, especially in the face of rising living costs and salaries not increasing in line with this. Knowing how to stay afloat, budget, and understand your finances can put you in the best position possible.
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