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Budgeting: How to stay out of debt

As families face the financial crunch brought by Covid and reducing government support, The Big Issue spoke to experts about how to budget and what to do if you’re facing debt

Low-income families are facing a “perfect storm” when energy prices rise, furlough ends and universal credit is reduced later this year, debt charities have warned.

Organisations voiced their concerns when energy regulator Ofgem announced the price cap would rise by £139, from £1,138 to £1,277, from October 1. This coincides with the furlough scheme and universal credit £20 uplift both ending on September 30.

More than one in five families receiving universal credit are already falling behind on essential bills, according to independent think-tank the Resolution Foundation. Citizens Advice said the combined effect of higher energy bills and the universal credit cut will leave three quarters of its benefit and debt clients unable to cover their living costs

​​James Plunkett, executive director at Citizens Advice, which is calling on the government to rethink the universal credit cut, said: “With bills rising and incomes falling, many families will find it hard to escape. For many, debt will be the inevitable consequence.”

We’ve spoken to experts about what to do if you’re facing debt and how to budget.

Talk to someone

There is still a lot of stigma around talking about money in British culture, according to the Money and Pensions Service, a government organisation offering impartial financial advice. In its recent survey, 38 per cent of people said they stay silent about money worries with reasons including embarrassment or fear of being judged.

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“Having a conversation with someone – a friend, family member or expert – can bring a different perspective and allow you to feel more in control as a result, ” Caroline Siarkiewicz, chief executive of the organisation, tells The Big Issue.

“So even though it can feel daunting, especially if you’re in debt or struggling to get by, seeking help and understanding how to make the most of the money you do have can make a huge difference to your finances, and to how you feel physically and emotionally.”

Money and mental health

Money and mental health are often linked, according to mental health charity Mind, whose recent survey of 10,000 people found nearly a third (32 per cent) said financial concerns were a growing issue during the pandemic.

“Worrying about money can have a negative effect on your mental health and poor mental health can make managing money difficult, says ​​Rosie Weatherley, information content manager at Mind.

“If you’re worried about the effect money problems are having on your mental health, or vice versa, it’s important that you talk to someone that you trust about this – such as, a family member or a close friend.”

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For advice on organising finances, claiming benefits when you have a mental health problem, dealing with services, and looking after your mental health when you’re worried about money, visit mind.org.uk/money.

What to do if you’re worried about debt

If your finances have been impacted by the pandemic and you have fallen behind on essential payments, know that you’re not alone.

“For anyone worried about being in debt, the first step is to work out how much you owe,” says Graham O’Malley, senior debt expert at Citizens Advice. “Make a list of who you owe money to and add up how much you need to pay each month.” 

The next step is to prioritise your debts. There are serious consequences for not paying your rent, mortgage, energy bills or council tax, from eviction to hefty fines. “You should talk to your creditors to see what support might be available for people in your situation,” O’Malley adds.

People who need help on prioritising their debts, claiming support or want someone to speak to their creditors on their behalf, can turn to Citizens Advice, which offers one-to-one support via its offices, by phone or email.

What to do if you’re facing debt

It can be easy to feel helpless when you’re facing debt, but there is always hope.

“It’s important to know that no debt problem is unsolvable,” says Katie Watts, consumer expert at MoneySavingExpert.com. “We’re yet to see a case where there isn’t a path to put things right, and starting to deal with debt, however difficult, is the very best thing you can do.”

According to the Money and Pensions Service, three in five people who receive debt advice have either reduced or cleared their debts within three to six months and three quarters of people who have received debt advice feel more in control after getting help.

Are you in debt crisis?

If your debts have spiralled out of control and you are struggling to pay all of your basic outgoings, you may be in debt crisis, says Watts. But there are many free organisations that can help you navigate your options, including National Debtline, Citizens Advice or Christians Against Poverty

Charity StepChange’s Debt Remedy tool can help you to work out your options.

People can also find out whether they’re entitled to any benefits through Turn2Us, entitledto or IncomeMax.

What to do if you have outstanding debts

People with outstanding debts may be able to temporarily cut the cost to zero per cent with a balance or money transfer card. 

“This will allow you to start paying down the debt instead of the interest – but don’t apply for anything before you’ve used an eligibility tool, which will show you what you could get without damaging your credit file,” says Watts. 

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If you have debt with your utility companies, it’s worth speaking to them as many will offer help.

“If you have any savings, use them to pay down expensive debt, not including student loans, – as right now credit cards and overdrafts will cost you more than you’re earning in even the top savings accounts,” Watts adds.

How to break the cycle of spending

If you’re struggling with money but you’re not in debt crisis, breaking your cycle of spending and reducing the cost of your bills and debt should be your priority, according to Watts.

“Look at what cash you have coming in and going out, be honest and include everything – even haircuts and transport costs – then, make a budget and stick to it,” she says. 

“Find out how to switch and save money on utilities, mobile phone bills, and insurance – often you’ll find that the more you know, the more you can save. See if there’s any non-essential spending you can cut back on too, as you’d be surprised how much the cost of a daily coffee or a weekly magazine can add up.”

The benefits of budgeting

Setting up a budget means you’re less likely to end up in debt. It also means you’re less likely to get caught out by unexpected costs, more likely to have a good credit rating and be accepted for a mortgage or loan and it will help you make savings, according to MoneyHelper, a government-backed service offering impartial financial advice.

Having a budget will help you understand how much you can afford to pay back each month if you do have debt. 

Free budgeting resources

There are many free budgeting tools available online including the Budget Planner on the MoneyHelper website. Other tools include The Money Charity’s budget builder, Citizens Advice’s budget tool or Money Saving Expert has a downloadable budget spreadsheet.

“Knowing where every pound is being spent is a great first step to starting your savings, getting out of debt or preparing for retirement,” according to MoneyHelper.

MoneyHelper has launched a new online programme called ‘Couch to Financial Fitness’ to help people learn about or get back on track with their finances. The first part of the free nine-week course is about making and managing a budget.

Another solution to managing budgets is Hastee, an app which allows employees to get their accrued pay before payday.

“The simplest of issues is often the reason why people fall into debt – a lack of liquidity,”  Jamie Hockin, marketing director, tells The Big Issue. 

“Liquidity is the lack of funds when you need it. It might be a £80 bill, but you are a few days from payday and you’ve had an expensive month so you resort to your overdraft, credit cards or worst of all payday loans.

“Solutions that solve that liquidity crisis, for small transactions, or no fees, have the ability to stop people getting into the cycle of debt in the first place. Giving people the option and flexibility of when they receive their pay can help avoid high-cost credit which is often the start of the vicious debt cycle.”

Hastee is a finalist in Nesta’s RapidRecovery Challenge.

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