This is part 5 of the 5 part series “Dig Yourself Out of Debt”, published every Thursday. Surfing old posts? You can catch up on Part 4 by clicking here, or start at the beginning by clicking here.

Hopefully by now you have worked out what you owe, started spending less than you earn, got your avalanche rolling and worked out why you ended up in debt in the first place.

Is there anything you need to do beyond that?

Just a little bit of housekeeping really.

Credit Reports

In part 1 I talked about using your credit reports to find any errant accounts you might have forgotten about.

Credit Reports provide a much wider view of your financial wellbeing than just who you owe money to, though. Now would be a good time to badger me to finish writing my “A Guide To: Credit Reports” and see all the different pieces of information they show, why they are important, and how to correct them if something is wrong (or doesn’t tell the whole story).

In the meantime log back in to your credit reports and take a careful look at all the information they present. Are there any inaccuracies? Are you linked to anyone you shouldn’t be?

Keep Records

While you and I were busy burying our heads in the sand and avoiding creditors, I suspect your record keeping was a little lacking in the accuracy department just as mine was. Everything that came through the door got filed under ‘S’ for Shredder, ‘R’ for Recycling or ‘P’ for Piles and piles of letters out of the way somewhere.

Now you have got to grips with yourself and your finances, get a proper filing system organised. There are lots of different methods about, but get yourself a filing cabinet, box file or some other container and get sorting.

Properly accessible financial files protect you in case of error. It makes preparing to apply for a loan or mortgage that much easier. Good recording keeping also enables you to analyse your financial life down the road should you wake up one morning and wonder “Just how much has my car cost me in its lifetime“?

Lost for where to even begin? The Simple Dollar has laid out the system I use now, or if you want to be 21st Century about it, check out the digital filing system that I want to try soon.

Reclaim Charges

This is not a guaranteed process,but for the sake of the few pounds it will cost you, it is worth spending the time to do. Few people would have gone through their own debt meltdowns without getting dinged for fees on bank and credit card accounts hourly or daily at the worst part of your journey. In the worst cases some people have reclaimed over £20,000. Some, as little as a few hundred pounds. The point is it is your money, the banks and credit card companies in the majority of cases had no legal right to fine you (only to recoup their ‘reasonable costs’), so you get to claim back with interest.

Keep Reminders

Now you are working towards getting out of your debt hole – or if you already have – keep reminders around you in the places you are likely to spend money. If you are working towards buying a house, put up a picture of your dream near your computer if Amazon is your weakness. If you like a double-mocha-skinny-latte instead, put a smaller picture of the same thing in your wallet.

Always count to 10 on the smaller unnecessary purchases, and keep a 30 day list for the larger ones. These tips and others are explained in my Frugal Friday! post for September 18.

I told you there was not much more to do, and I wasn’t kidding! Debt is just a very small slice of the whole ‘personal finance pie’ though, and I would hope and encourage you to stick and keep an eye on the entire pie to get tips all over the place for saving and growing your money.

• A Fundamental Question
• Credit Card Analysis: From Hell to Heaven
• 10 Economic Predictions for 2010
• Say Hello to Kublax
• Two Steps Forward, Three Steps Back

I think it is fair to say that the world loves us to spend money. This in itself is not an issue; spending money keeps the economy revolving, keeps people employed, goods being manufactured and exported and taxes incoming. The problem begins when we start to spend money that is not ours.

Throughout this “Dig Yourself Out of Debt” series, we have worked to pay back money we owe to others because we have borrowed at some point – or at lots of points – in our past. It may have helped pay for home renovation, holidays, a new car or two, or just lavish lifestyles that our incomes did not support alone. In effect we were spending more than we were earning, and taking on debt to cover the difference.

If we are to stop ending up in the same position after working so hard to pay off the debt we are in now, a true shift in perspective is required. Much like when people “go on a diet”, this gives the false impression that at some point the diet will end, and everything will be great. For a while it is, but the weight soon starts creeping back on as we return to old habits. A chocolate bar here, an extra meal out there. Before most dieters know it they weigh more than they did before they started.

Those who succeed over the long-term where weight loss is concerned never went “on a diet”. They engaged themselves in a change of lifestyle. They did not delude themselves that at some point their being good will come to an end and they can return to their old ways. They decided to change their relationship with food and exercise forever.

Getting out of debt is not a short-term fix. It is not a short temporary hardship – it requires a complete monetary rethink, much like a person who maintains successful weight loss changed their entire lifestyle. Live according to your means, not up to your expectations. If your net (take home) pay is £850 a month then you need to realise that a lavish lifestyle is just not yours to be grasping. Until we acknowledge this reality we will never break our spending addiction.

Any attempt to live like you earn 3x the amount you do will simply end up returning you to a mountain of barely serviceable debt. Spending this will make you no happier than if you simply had not even bothered trying to delude yourself and others in the first place.

With that in mind, here is my ‘Debt Psychology 101′.

Stop keeping up with the Jones’. Our society places an artificial need and desire to “one up” our neighbours and social peers. If your next door neighbour drives a Mercedes, then your ‘need’ to go out and buy a Lexus is niggling away at you day in, day out because we don’t like being perceived as inferior to others. Does your friend have an iPhone 3G? How many times have you wanted to go out and get yourself a 3G S to get one better than him?

Appearance is not everything. Your neighbours may have two Mercedes and a Land Rover Sport on their driveway, but they have likely sunk themselves into debt servitude to do so as I highly doubt that they have gone and purchased them outright, especially in the current economic climate. They will be saddled with debt from their desire to put out a perception of wealth that is as hollow as a malteser. It might appear hard on the outside, but it’s full of holes on the inside. Their income may be significantly higher than yours, but it is likely their debt is significantly higher as well. Side-by-side, you are probably better off than they are.

I drive a 7 year old car that I could replace with something newer if I wanted to give out a better appearance of my financial position.  I keep driving my old car because it does what it is supposed to do; it is cheap to run and all the time I hold off buying a new car, I accumulate real wealth (or do not sink myself deeper into debt). Either is a good thing.

Celebrate real wealth. What would you rather do? Give the appearance of wealth, or have wealth? One of the best life lessons I have learned from my journey to become debt free is that consumerism is not all it is cracked up to be, and I have disconnected myself from that lifestyle completely.

I appreciate what I have already, and use it to the best of its ability. Yes I would like an iPhone, and if someone offered me one for free I would take it as there is no denying – it is good technology. But I do not desire one, and I certainly will not be buying one even after I am debt free. Why? Because I do not need it. Yes it would increase my friends’ perception of me and my financial position, but I do not care what others think of my financial position. I would rather know that I am financially secure, than give out that appearance.

Beware the power of advertising. For our entire lives up to this point and beyond, we have been and will continue to be barraged by media advertising anything and everything, and all saying that “your life will be better with Product X” or the fact that “the 2009 Product X is significantly better than the 2008 Product X and anyone who has not rushed out and upgraded yet is poor, stupid, or a combination thereof”.

One prime example is L’Oréal: “Because you’re worth it”. Really? If I do not buy this product then someone else is worth more than me?

You may think I jest, but the next time you see advertising of any sort, disconnect, step back, and really analyse what it is saying about whatever is being promoted. Once you start to see through this, your consumerist nature diminishes and you find more money appearing in your bank account at the end of each month.

Less is more. I am happier now than I have ever been at any point in my life. That is despite the fact I am getting divorced, despite the fact I am in debt, and despite the fact I acknowledge my job is potentially at risk. Why? Because I have got off the carousel of consumer debt accumulation and started to appreciate what I do have. I have my health, I have family and friends, and I make what things I do buy work that much harder for me. These days I am much more content with a library book or a DVD from my LoveFilm subscription than if I went and splashed out on a DVD boxset every week.

Some people are naturally frugal courtesy of their upbringing. I was a spoiled child if I am honest, and I paid for that later on in life by believing I could still have everything I wanted now, even though it was not supported by my income. When I was married the situation just became even worse.

If this sounds like you, and the reason you got into debt was simply spending more than you earn courtesy of consumerist desires, you can undo that. It is possible to change; I am living proof of that.

Of course this does not take into account the other reasons of being in debt. Sometimes, you are just down on your luck and circumstances conspire against you at the worst possible moments. Only you can decide which one is really the reason you are in debt if you are.

Identify your own reasons, spell them out, and work on changing your lifestyle accordingly. Providing you live by a simple mantra, debt will never be a problem again:

Live according to your means, not up to your expectations.

• Job Front Update
• The SCRAM Plan
• 10 Economic Predictions for 2010
• My Financial Meltdown: Part 1
• MBNA Launch Best Credit Card Balance Transfer Deal Ever

So far we’ve found out exactly what we owe, and hopefully freed up some extra cash. The next step is to begin actually paying off our debts as quickly as we can. This isn’t pretty if you want to do it quickly like I am, but if you’ve no real urgency and can handle being in debt for longer, then pace yourself. Just remember that the longer you take, the more it costs you in interest.

Reverse Snowballs, Avalanches and Snowflakes

No I haven’t gone mad, and Christmas hasn’t come early! Not in that sense, anyway.

Reverse Snowballing (aka Avalanching) is a method of debt repayment, and one that makes the most sense as you’ll see below. Snowflaking is a term for making micro-payments on top of what you’d planned if you find extra cash that you didn’t calculate having.

Consider this: If you find a fiver in the street, what is a better use of it? Buying you and your mate a Starbucks, or sending it to Barclaycard? Ultimately only you can decide what you’d rather do with it but I’d send it in as a snowflake on top of my snowball.

Time to Reverse Snowball

Continuing my imaginary friend example from Step 2, Selina has decided she has made all the changes she is willing to make in her life in terms of cracking her debt problem.

Her situation was not all that dire, and simple changes were sufficient to see her out of her spiral and into positive balance each month. You (and I) may need to make bigger sacrifices if we’re to dig ourselves out of our respective holes. Perhaps you’re luckier than Selina and I and your debt situation is smaller or less expensive. Either way, it’s fair to say that life would be more fun with no debt.

As a quick reminder, Selina made £480 from decluttering, and had £222 spare each month after paying all her bills and making the minimum debt repayments all round.

Step 1: Order Your Debts From Most Expensive Downwards

There are several thoughts on this but the bottom line is paying off your most expensive debts first, saves you cash in the long run. In Selina’s case her most expensive debt is her second credit card, charging her 27.9% on her £1,000 balance. Her other card followed with its £5,000 balance at 14.9%, and then finally her mortgage at 4%.

In Avalanching (or Reverse Snowballing), you pay off the most expensive debt first, then the next, then the next, trying to cut how much you give away in interest payments. In a traditional snowball, she’d by chance still pay off the £1,000 balance first, as it’s the smallest but if the interest rates were reversed in our example and she followed the traditional snowball method, she’d be keeping the more expensive debt hanging around while she concentrated on paying off the smaller balance.

While this feels good emotionally (it’s always good to see the back of a debt, and attacking the smaller one makes it happen quicker), it doesn’t make money sense. If you’re interested in the raw numbers of why, Trent @ The Simple Dollar worked it all out already with examples.

If you’re not all that interested in the why of the method, just order your debts from highest APR to lowest, and pay off the highest first. It’ll save you lots of money!

Step 2: Discount Your Mortgage

If you are not in arrears, then don’t count your mortgage. It’ll be the cheapest line of credit you have anyway, even though it (hopefully) has the largest balance outstanding. Mortgage Freedom comes long after Unsecured Debt Freedom.

Step 3: Throw Snowballs, From Top to Bottom

Once you’ve ordered your debts from highest APR to lowest, start paying off the most costly debt first. Selina paid £480 to Credit Card 2  in one go from the sale of her clutter, and then £222 every month on top of the minimum payment. With a couple of snowflakes she found in her budget, she paid the card off in just 2 months.

Her next card would take longer, but she also had an extra £50 a month to pay it off with as she was no longer making any payments to Credit Card 2 because it has a £0.00 balance.

This is where the reverse snowball analogy comes in, for those who were still wondering if I had lost my mind completely. As the snowball continues to roll down the hill (this is you paying off your debt), it gets bigger and bigger as it goes. It’s the same for your debt repayments: As you clear debts, your ability to make bigger and bigger payments increases.

Thanks to her snowball and some snowflakes, she cleared this card in just under a year.

The Power of Snowflakes

Don’t underestimate the power of making many small payments to your currently attacked debt. If you manage to find a spare £5 every two weeks, then you’ll have paid off an extra £130 on top of your other big payments each year.

Selina is now debt free – and you can be too!

Selina’s example is quite simple in terms of how many debts she had and how much she owed. But it serves as a great example as to how it is possible to get out of debt, and how quickly. It just takes dedication, time and belief in yourself.

Next week I’ll be looking into the reasons we end up in debt in the first place and how you can combat them.

Have you snowballed? Did reverse snowballing make more sense to you? How are you currently getting out of debt if you’ve already started on another method?

• Frugal Friday! 20 Ways to Cut Your Annual Vehicle Costs
• Reclaim Bank & Credit Card Charges
• Beware The Balance Transfer Cheque
• Dig Yourself Out of Debt: Know What You Owe
• A Fundamental Question

The title of this post may come as a bit of an obvious statement, “of course you need to spend less than you earn! Otherwise you’d end up in .. oh”. The accumulation of debt to problematic levels occurs when we spend more than we earn, often without realising it. A gym membership there, a mobile phone contract here.

In the worst scenarios we end can end up in a debt spiral where we keep taking on new credit to be able to make repayments on old, all the while hiding behind the pile of credit card and bank statements. Before you know it, your entire income is being spent making interest payments and there is nothing left to live on.

Worse still, when you come to grab more credit to live on, you get refused.

Congratulations: you’ve just financially imploded.

Now what do you do?

Hopefully you are not in that deep, but deep enough to have seen the danger signals. If you are in that deep or perhaps beyond, stick around because there is still some useful advice to be found here. If you’ve followed the advice in last week’s post, you hopefully know exactly where you stand in terms of what you owe. If you don’t have all that paperwork with you, go grab it. You’re going to need it.

A Statement of Affairs

Debt is only one part of the financial pie. To get to Total Situational Awareness, I’m going to get you to create a Statement of Affairs, or ‘SOA’.

This is basically a document that lists every single household expenditure and income source, debt, liability and asset. It sounds like a lot of work but it’s really not as bad as it sounds. If you can lay your hands on your recent utility bills or bank statements, you’re all set.  I’m going to provide a link to a little tool after the example below that’ll do most of the work for you but you will need to supply it with accurate numbers for the exercise to be worthwhile.

Selina Is In Trouble

I learn best by example, so I’ve come up with an SOA for my imaginary friend Selina. Her experiences are a little like mine, bless her. She’s had enough of her debt situation and wants to take charge, before it consumes her completely.

She holds down a well paid job but is finding despite this, she doesn’t have any money left after the bills to actually enjoy life and increasingly, is having to reach for her non-maxed credit card to make it to the end of the month.

For the sake of simplicity, she lives alone, and claims no benefits.

Statement of Affairs and Personal Balance Sheet 

Household Information

Number of adults in household........... 1

Number of children in household......... 0

Number of cars owned.................... 1 

Monthly Income Details

Monthly income after tax................ 1500

Partners monthly income after tax....... 0

Benefits................................ 0

Other income............................ 0 

Total monthly income.................... 1500 

Monthly Expense Details

Mortgage................................ 500

Secured/HP loan repayments.............. 0

Rent.................................... 0

Management charge (leasehold property).. 0

Council tax............................. 85

Electricity............................. 50

Gas..................................... 50

Oil..................................... 0

Water rates............................. 20

Telephone (land line)................... 15

Mobile phone............................ 45

TV Licence.............................. 12

Satellite/Cable TV...................... 45

Internet Services....................... 15

Groceries etc. ......................... 200

Clothing................................ 50

Petrol/diesel........................... 50

Road tax................................ 20

Car Insurance........................... 35

Car maintenance (including MOT)......... 10

Car parking............................. 0

Other travel............................ 0

Childcare/nursery....................... 0

Other child related expenses............ 0

Medical (prescriptions, dentist etc).... 0

Pet insurance/vet bills................. 0

Buildings insurance..................... 10

Contents insurance...................... 10

Life assurance ......................... 0

Other insurance......................... 0

Presents (birthday, christmas etc)...... 10

Haircuts................................ 25

Entertainment........................... 50

Holiday................................. 0

Emergency fund.......................... 0 

Total monthly expenses.................. 1307

Assets

Cash.................................... 500

House value (Gross)..................... 110000

Shares and bonds........................ 0

Car(s).................................. 2000

Other assets............................ 500

Total Assets............................ 113000

Secured & HP Debts

Description....................Debt......Monthly...APR

Mortgage...................... 80000....(500)......4

Total secured & HP debts...... 80000.....-.........-   

Unsecured Debts

Description....................Debt......Monthly...APR

Credit Card 1..................5000......250.......14.9

Credit Card 2..................1000......50........27.9

Total unsecured debts..........6000......300.......-  

Monthly Budget Summary

Total monthly income.................... 1,500

Expenses (including HP & secured debts). 1,307

Available for debt repayments........... 193

Monthly UNsecured debt repayments....... 300

Amount short for making debt repayments. -107

Personal Balance Sheet Summary

Total assets (things you own)........... 113,000

Total HP & Secured debt................. -80,000

Total Unsecured debt.................... -6,000

Net Assets.............................. 27,000

In our example above, you can see Selina is currently spending £107 more every month than she earns. This equates to accruing £1,284 of new debt every single year until she implodes, if she does nothing. In Selina’s case, she was actually finding she was nearer £200 overdrawn each month rather than just £107. This was probably due to buying magazines and her weekly visit or three to Starbucks.

Working out your own SOA

The internet is great, and as usual someone, somewhere, has done most of the hard work already. You can work out your very own SOA by using this fabulous online tool. Once you have your own, see where you are at.

If you have cash left over each month, GREAT! You already spend less than you earn and that deserves a little pat on the back. Now carry on reading and get some tips for spending even less to free up cash for debt repayment.

If you calculated you have a shortfall like Selina though, DANGER. You’re heading for a debt spiral and definitely need to keep reading.

Cut Your Spending

This sounds really daunting and yet really obvious all at the same time. With some really simple and painless adjustments and a small amount of initial legwork, Selina ended up in the black each month instead of the red, and so can you. Alternatively you can use these tips to see just how easy it is go get extra money to repay debt quicker. Let’s see how:

She Switched Energy Tariffs

Instead of sourcing her gas from one company and electricity from another, she switched to a Dual Fuel deal and locked in with the same supplier for 12 months. This resulted in saving £15 a month. See if you could save and head over uSwitch, GoCompare, Money Supermarket or your price comparison site of choice.

She Cut Her Energy Use

Selina believed she was hopeless at “being green”, so she vowed to just do the simpler things and see how it helped. She turned down her thermostat on her heating by 1 degree, and reduced the boiler’s hot water temperature so it didn’t need to heat quite so often. She also changed to low-energy lightbulbs and made sure she switched lights off as she left the room. She found doing this saved her around £20 a month.

She Changed Mobile Tariff

In order to get the latest snazzy phone when she last upgraded, she had to up her price plan to £45 a month. This suited her at the time, but now she is looking for ways to cut back and this is a big expenditure (£540 a year!). A quick chat with her provider saw her  dropping from paying £45 a month to just £20: A £25 saving every single month, and she still gets sufficient texts and minutes to not need to pay for going over her monthly allowance.

She Dropped a Sky Package

Well, she threatened to. Selina realised she didn’t have the time to watch many of the sport and movie channels she got with her Sky package, so she phoned to cancel. However the person she spoke to offered to halve her bill for 6 months if she didn’t. She liked having the option of watching them so she went with it. In 6 months time if she is still feeling the pinch, she retains the option of dropping a package or two. £22.50 saved.

She Cut Her Food Bill

Selina loves Chinese takeaway, but at £10 a time on average, even if it supplied her with meals for two days, it was proving an expensive way to eat. She decided to cut down the takeaways to one a month, and cook more fresh food at home. This not only made her healthier in the long run, but made her enjoy her takeaways again rather than feeling like she ‘had to’. £50 saved.

She Sacrificed her Entertainment Budget

So far Selina has not had to make too many intrusive changes. In fact all but the food change resulted in no noticeable difference in her routines whatsoever. But Selina realised that if she wanted to be debt free quicker, then in the short-term she’d need to cut down on this. She did decide to keep her small LoveFilm subscription, and also a few pounds for drinks when invited out by friends but put the rest towards debt repayment. £40 saved.

She did a Credit Card Shuffle

In the words of Martin Lewis, there’s a conspiracy in the credit card world. The fact you don’t need new cards to cut your interest is covered up; new card applications are profitable – not just for lenders, but internet price comparison services that earn fees when you get cards through them.

By simply phoning her credit card companies and asking for a rate reduction – she got it, saving her another £40 a month in payments to her credit cards. All this cost her was (in her mind) the audacity to ask, and a 5 minute phone call to each card company!

Without even really trying, Selina has freed up £212.50 every month than that she was paying out needlessly, resulting in her being £172 in credit every month instead of deep in the red.

Could she do even better? She’s now caught the bug and wants to have as much spare cash as possible to pay off her debts. If you’re still with me here, let’s take a look at some other ways she can save some money.

Downshift

Selina is a bit of a foodie, and thinks nothing of buying premium brands, Finest bread and all the usual consumerist actions that supermarkets love us to do. She often grabs the first product that she spots, and that costs her dearly. Goods placed at eye level are usually the ones that the company makes the most profit on, so slow down and always scan the entire shelf space when looking to buy.

She decides to stop this practice and also buy less of the top branded products, and try dropping a level. This isn’t a case of going from ‘Finest’ to ‘Value’ (if you shop at Tesco), but instead trying the same product in a different price band to the one you normally buy. If you usually buy Finest, try a brand name instead. If you normally buy a brand name, try the stores-own. If you normally buy stores-own, try their value range.

Dropping one product level generally results in no noticeable difference in taste, but can mean pounds saved just on one product. If the drop doesn’t work for you in a particular product, by all means go back up again. This isn’t about torturing yourself.

The difference between the Finest product (1kg) and the Value product (which contains a full 500g more!), is £2.52. Every product level you drop down though, saves you money. The best value in that table when you consider taste and texture is likely the Own-Brand, saving you £2.30 in total for probably zero difference in taste. When you multiply that saving across your entire shopping trolley you begin to see how it adds up.

• If you buy a lot of fresh vegetables and products for home cooking, ditch the Organics, at least for now.
• If you buy a lot of meat, consider more vegetarian meals or bulk out the dish with vegetables and/or lentils.

By dropping a brand level and buying a little less meat, she shaved a further £40 a month off her food bill.

No Spend Days

Selina realised that on paper when she first did her SOA that she was – on paper at least – spending £107 more per month than she earned. Except, as we saw earlier, she was always nearer to £200 overdrawn each month.

Digging through the scrunched up ball of receipts in her handbag, she was horrified to add up nearly £80 of make up, magazine and Starbucks purchases that month alone.

Keep A Spending Diary

If you struggle to identify where your money goes every month, consider writing down every time you spend. At the end of the month, you’ll be surprised how much incidental spending you do. £2 on a coffee here, £5 on a couple of magazines while waiting for your train there: it all adds up. Once you know what you spend on top of your regular outgoings you can formulate a plan of attack.

Choose How Many In Advance

Not spending anything other than your budgeted-for items is hard. Doing it forever is even harder, and could lead to feeling deprived and splurging to compensate. Agree with yourself in advance how many days each week or each month you are not going to spend anything and then stick to it. Keep a diary and mark off your ‘NSD’s and then whether you managed it or not.

Keep a Reminder In Your Wallet

It can help to keep a reminder near your cards and cash, such as a picture of your kids, the house you want to buy, the car you want to get and so on. Every time you open your wallet you’ll see your reminder and hopefully consider whether what you are about to buy fits in with your own goal.

Know This: It Gets Easier

The first few weeks and months it will be hard if you’ve always bought what you want, when you’ve wanted it. However the longer you train yourself to not buy things on a whim, the easier it gets. I haven’t actually bought anything that hasn’t been in my budget now for 6 months and it feels great to have broken that consumerist cycle.

Up Your Income

This is slightly more difficult, requires work on your part, and  ultimately depends on how badly you need the money. Sometimes it’s no longer possible to spend any less than you already are without starving, but you find you are still spending more than you earn.

When you get to here, the only option is to up your income.

Do Surveys

Online surveys are a good way to earn an extra £20-30 each month if you dedicate a few hours a week to it. If you have the time, you can double this figure or better, but it depends on the survey site. Martin Lewis has some good advice on which are best. Selina made an extra £10 every month by spending just an hour a week doing surveys.

Sell Stuff

Artistic? Consider making and selling jewelery, cards or other craft items. If you work in an office and are allowed, put up a sign offering home-made ‘all occasion’ cards made to order. For 10 minutes of work you could charge upwards of £5 a piece.

Start a Blog

If writing is more your style and you have a topic you are deeply interested in, start blogging. The returns in the beginning are likely to be small, but if you are good at it and the topic draws large readership, it could make you thousands in the long term. Open your own free blog over at either WordPress or Blogger and see where it takes you!

Declutter

If your house is anything like Selina’s, it’s full of a lifetime of accumulation. She uses very little of the ’stuff’ her place is full with. Start a Declutter Mission. Go through every single room in the house; every cupboard; under the stairs; in the loft; check the basement. Find everything you do not use or no longer want. Grab your camera, then eBay the lot. You could realise thousands of pounds! Selina managed to realise £480 just by selling old clothes she no longer wore, and some gadgets she had laying around.

Get a Second (or 3rd) Job

Sometimes the little things above won’t be enough, even when combined. See if you can get a second job paying part-time hours. This can easily supply an extra £250 to £400 a month and while perhaps not sustainable in the very long term, could help you out of a situation you find yourself in now.

Do A Credit Card Balance Transfer

Selina was struggling with the fact that the card she had the highest balance on (£5,000 in our example) was charging her nearly 15% interest. In credit card terms this isn’t all that bad, but she also knew that if they decided to hike up her rate, she’d sink very quickly. Paying the minimum as she was, would take her over 12 years to pay it off and cost her tens of thousands of pounds in interest.

Selina was unable to get a 0% BT card as her credit rating wouldn’t allow her any more credit. This doesn’t mean you’re going to be in the same boat though, so it’s worth looking at any current offers to see if you can save yourself a packet. Even if a new card doesn’t allow you to transfer the entire balance, any percentage at 0% is better than the rate you’re currently paying.

Remember the cardinal rule of balance transfers: Never, ever, ever spend on the card! Due to the way repayments are calculated, you could pay interest on what you purchase for the entire life of the balance transferred!

Get A Consolidation Loan

I’m not a fan of doing this as unless you’re very strong-willed, you can end up in the same situation you’re in now, only worse. The temptation for some (“my credit card balances are zero! Let’s spend!”), can be too much to resist.

However if you know you can be good and honest to yourself, don’t rule out getting one big loan at a reasonable rate to cover all your existing debt. Shop around for the best rate and be sure there are no early repayment penalties or restrictions on overpaying.

You could do worse than getting a quote from Zopa rather than a bank. The beauty of Zopa is it’s people like me lending you the money, and not some huge, faceless corporation that ultimately doesn’t care much about you or your personal circumstances, just about their shareholders.

Move House

Have you noticed that as we get further down these suggestions, they’re getting more involved and more serious? That’s deliberate. Depending on how short you are each month, depends on how far you’re prepared or need to go.

If you are spending £750 a month on renting a 3 bedroom semi, could you make do with a 1 bedroom flat for £350 instead? This may not be an option depending on your arrangements and situation already, but should be considered if you still have sufficient operating capital to finance a move before things descend further into a debt spiral.

Moving home will impact your credit rating in the shorter term, so if you’re going to apply for a loan or a new credit card for transfer purposes, do it before you move.

Individual Voluntary Arrangement

This is essentially one step away from going bankrupt. From Wikipedia:

“The IVA was established by and is governed by the Insolvency Act 1986 and constitutes a formal repayment proposal presented to a debtor’s creditors via an Insolvency Practitioner. Usually (but not necessarily) the IVA compromises only the claims of unsecured creditors, leaving the rights of secured creditors largely unchanged.

An IVA is a contractual arrangement with creditors and can be as flexible as an individual’s own circumstances; they can therefore be based on capital, income, third party payments or a combination of these.

Creditors take a decision at a creditors’ meeting called to consider the IVA proposal. The return to creditors is often higher than they would receive in bankruptcy. A vote is taken – by value. More than 75% in value of those creditors who vote at the meeting by person or by proxy must agree in order for the arrangement to be approved. If any of those voting are ‘associates’ (usually business associates, friends and family) then a second count is taken and 50% of non-associated creditors must approve it.”

As you can see this is not for the feint of heart,  but it does offer a lesser alternative to actually filing for bankruptcy, which can signal the end of your financial life for a considerable period of time. If your IVA fails then bankruptcy may be your only alternative.

If you’re considering going this route, please read Martin Lewis’ full IVA Guide before taking any steps. Some companies will charge you a fortune, when there are free charity alternatives (see below). Note that an IVA WILL affect your credit rating severely but perhaps not as badly as the alternative: going bankrupt.

It’s Good to Talk

When things get too much, it can be good to talk. There are a wealth of organisations you can talk to about your money worries, including if it is affecting your health. If, despite this post you find you still cannot manage, please speak to these folks – they are experts in their fields and will help you with good solid legal advice and support you through it.

The NHS runs a CreditCrunch helpline on 0300 123 2000 (8am to 10pm every day) and website for those suffering in the current climate.  Trained health professionals will give good, solid, practical advice for how to deal with the health side of being in debt or in the middle of the recession.

National Debtline run a website and also a helpline offering free confidential independent advice on dealing with debt problems. Contact them on 0808 808 4000 (mon-fri 9am to 9pm,   sat 9.30am-1pm).

CCCS is the Consumer Credit Counselling Service, a registered charity offering free, confidential advice and support to anyone who is worried about debt. Visit their website or call them to chat in confidence on 0800 138 1111.

In Closing

The purpose of this article is to prepare you for Step 3 in my 5 Step Plan for debt freedom (aptly called “Dig Yourself Out of Debt in 5 Steps”). In Step 1 we found out exactly what we owe, and seen how much spare cash – if any – we had and tried to increase that amount in this post, Step 2.

Are you spending less than you earn? Have you found any inspiration for cutting your outgoings in this article? Share what worked for you in the comments and remember to check back next Thursday for the next installment in this series.

Continue reading! You’re getting closer to enlightenment. Part 3 is here.

• Dig Yourself Out of Debt: Cleaning Up
• My Financial Meltdown: Part 4
• The Credit Crunch Has Positives
• A Humble Return
• 10 Economic Predictions for 2010

I’m a regular over on the Money Saving Expert forums, particularly the ‘Debt-Free Wannabe’ area. On a daily basis, people post that they owe money, but they’ve no idea to whom, how much for, or at what rate. Before you can even begin to cut your debt, you have to know what you owe.

Priority Debts – First things first. Do you have any Priority Debts? These generally are:

• Council Tax
• Mortgage / Secured Loan / Rent
• Child Support
• Court Fines

Falling behind on these can see you homeless, sent to prison or both, hence the term ‘priority debts’. Either is unlikely though, if you make a best effort to pay back what you owe with what you have available to you. In terms of council tax, the minimum arrears payment for someone on a low income can be as little as £2.65 a week.

Once you have got your priority debts under control, it’s time to attack ‘everything else’.

Find your loan agreements – Hopefully you’ve kept them safe and accessible. These will show what you’re paying, at what rate, and when it ends. If you can’t find this then check your bank statements to at least get some idea of the monthly figure. We’ll see in a little while how to find the remaining missing information.

Find your credit card statements – or access them online. Credit cards with revolving balances are usually one of the most expensive ways to borrow money longterm, with perhaps the exception of the payday loan sharks. Interest rates vary wildly from a very good 6% up to a wild 55% and beyond, depending on your own personal circumstances and payment history.

Are you in arrears with utilities? Don’t forget to take into account any arrears with your electricity, water, gas, or telephone suppliers. These generally won’t affect your credit rating but can have much more direct consequences, i.e. disconnection.

Are you in arrears with credit companies? You need to take action right here. These will affect your credit rating, and can and will end up costing you a fortune for up to 6 years after the fact. Talk to your lenders and come to an arrangement to pay what you owe, including arrears. Ask them if they can freeze your interest, effectively turning the credit product into a fixed-term loan. Don’t bury your head in the sand over the issue, as it’ll only get worse the longer you leave it. You’ll also probably start to get harassing telephone calls hourly or daily around this point, demanding you make payments you probably cannot afford. You don’t have to take this though: demand all contact by written form in future and advise them that further telephone calls will be dealt with as harassment. Speak to one of the debt charities (CCCS are very good) or Citizens Advice as a matter of urgency.

Defaulted. Debt sold. Now who do I owe? – This is where it gets murky. If you know who you owed prior to this point, contact your old lender. They may be able to tell you who they sold the debt onto.Alternatively pull your credit reports and see where the defaults are, and who they are from. This will also give you some idea of the amounts. If it has got to this point, your credit rating has already likely taken all the battering it’s going to for this debt, so it gives you the upper hand. Your debt would have been purchased likely for pennies in the pound, so you may be able to make a vastly reduced payment to the Debt Collection Agency. They would get their ‘profit’, even though you pay far less than you originally owed. It won’t fix your credit report though, but neither would paying back the full amount.

Get Your Credit Reports – There are three Credit Reference Agencies (CRAs) in the UK: Equifax, Experian and CallCredit. These folks compile your financial history in terms of your borrowing and more importantly, your reliability in paying back. Other lenders then use this historical information to credit score your future suitability for a particular product.

The information on the files remains for 6 years from the point of settlement, so if you had a bumpy credit card ride when you were 18 and finally closed the account when you were 20 it can still affect you when you try and get a mortgage at 25! Check their respective websites for a 30 day free trial, but remember to cancel before the period is up to save paying anything. Right now (at the time of writing) Experian and Equifax offer free trials. CallCredit charge £12 for 3 months of access.

One benefit of accessing your reports is they can help fill the gaps in your lending knowledge. The CRAs will know what you owe, to whom, when the agreement started, how much you should be paying, and when those payments are due!

Knowledge is power, and once you know what you owe, you are very knowledgeable indeed.

Continue reading the Dig Yourself Out of Debt Series – Part 2 is here.

• Frugal Friday! 20 Ways to Cut Your Annual Vehicle Costs
• Dig Yourself Out of Debt: Psychology 101
• Is Debt Worth It? Does It Matter?
• My Networth Update - Aug 2009
• A Guide to: Individual Savings Accounts (ISA)