Clear your debts

 
Here is how to make your own debt management plan to order to get out of debt and become debt free. Please note it takes time to work through the steps, be patient and stick it out and you will clear your debts.
 
Step 1.
 
First you need to establish exactly how much debt you have. Start off with your credit card debts. Next list all the unsecured personal loans you have and then list any hire purchase agreements you may have (for example if you bought a new sofa suite on a payment plan). Finally if you have a mortgage, list the amount outstanding, the interest rate and the monthly payment. Next to each item list the amount outstanding, the interest rate, the monthly payment (for credit cards list the minimum payment), and if applicable the term left outstanding (eg for the personal loans and mortgage).
 
Your list should look something like this (the figures quoted are an example):
 
 lender  amount outstanding Interest Rate   Minimum Payment  Term outstanding
 Card1  $14878  17.5%  $446.34  n/a
 Card2  $16078  13%  $482.34  n/a
 Personal Loan  $1200  8%  $99.69

 13 months

 Mortgage

 $87000  5%  $460  18 years
 Total  $119156    $1488.37  
 
 
Step 2
 
This step involves establishing your income and expenditure. List all sources of income, from your main job to interest from shares, income from lodgers, any pensions, and any benefits you are due to get from government. Do the same for your expenditure - this will probably take several attempts to get right (people tend to forget items and those in debt are even more prone to do this having lost control of where their money is going.  Include absolutely everything - rent/mortgage, insurance, property tax, food, electricty, gas, telephone, internet, clothes, transport costs costs (insurance, gasolene, rail tickets etc), maintenance costs, vet fees, doctors fees and so on.  Don't forget to include the costs of making the minimum payments on your debts. See the budget checklist in the sidebar to help you pick up every item on your list.
 
Once you have established the figures, take the expenditure away from the income to see what is left. If the figure is at all positive, then you are in a lucky situation even though you have debt, as you have the room to start paying it down. For most people however, the net sum will be negative. That's how they got into debt in the first place.
 
Step 3
 
This step involves making a serious attempt to get your expenditure down. It will take awhile, don't be discouraged if you are not making progress as fast as you would like. To help keep your spirits up, keep a list of every single "win" you have at cutting down expenditure.
 
First start with the big items, the utility bills. Check on the price comparison sites to see if you can save money by switching your electricity, gas and phone providers. When I did this exercise I found I could get my internet bundled with my landline and it halved what I was paying for the two services.  Similarly changing energy provider can yield substantial savings. It will take several weeks for the switch-over to be effected, but get things rolling by phoning them up, and signing the relevant forms to switch.
 
Next look at things you think you might be able to do without entirely. Cancel your cell-phone contract entirely if you can do so without penalties. Otherwise make a note of when the contract ends and cancel then. Switch to a pay-as-you-go option and then try to cut down on the amount you use your phone. SMS (text) messages are usually far cheaper than making phonecalls, so start changing your habits. It's also not necessary to have all the expensive fancy cable/satellite television packages. However much you enjoy it, you simply can't afford it. It's not such a hardship to do without - you can spend the time you would have watching television, surfing online -  it's a form of entertainment too.
 
Put a hold on buying new clothes for now, and cut back on things like hairdressing by simply extending the time between visits (i.e. instead of going every four weeks, make it every five - by the end of the year you will have saved the cost of three visits).
 
Cut coupons and start only put things in your supermarket trolley if they are on special offer. This means you'll be eating something different every week, but shopping this way does save you a lot of money. Stop eating out and put a hold on going to restaurants and to the cinema for the moment.
 
Examine your spending on the so-called "addictions" (smoking, alcohol and gambling). Many people get into debt because their addiction has got the better of them, and they have a compulsive urge to gamble or get that bottle of wine or that pack of cigarettes even if they haven't the money. Seek professional help from one of the charities (Alcoholics Anonymous and Gamblers Anonymous, if you are a smoker, see help from your doctor. Beating your addiction will not only save you money, it will vastly improve your life. Use the impetus to get out of debt as an excuse to tackle the more serious behaviours in your life.
 
Finally, there is a lot of stuff that you can get free if you know where to look. Freecycle is a list of stuff that people are giving away free, and you can get all sorts of things - furniture, bicyles, you name it.  Local Exchange Trading Schemes allow you to barter skills - eg you do someone's gardening and earn points which you can spend by getting someone to do your plumbing. It's a useful way of getting services without paying money and schemes exist around the world.
 
It will take a good week or longer to get through this step. Once you have, recalculate your expenditure and see how much you have saved.
 
 
Step 4
 
This step involves increasing income.  Again, go for the big gains first. Check if you can do some overtime at work, and consider taking on a second job on the weekend or during the evenings. Despite the recession there are still part-time jobs available that no-one wants to do - cleaning, takeout food delivery, shelf-stacking, working for McDonalds. That's because many people are too proud to accept this work. Don't be proud - instead understand that taking on the extra work can speed up the rate you become debt free. If your company has put you on short-time, where you are only working three or four days a week, it's doubly important to use the free time to do another job.
 
Next, go through your house and clear it, making anything you don't use for sale. This should take you a few days, but by the time you've finished you should have plenty of material. Put it all on Ebay or Gumtree - people are still buying stuff believe it or not, and that's because they can get things cheaper on these sites than buying new.
 
Whist clearing your house try to clean out your spare room so that you can rent it out. Renting out a room is one of the easiest and most lucrative ways of increasing your income. Because of the recession you will have plenty of takers - it's cheaper to rent a room, than to rent an apartment.
 
Step5
 
Paying down the debt. By now your spending will be down sharply and you income will have increased a bit.
 
Firstly use any lump sum raised from selling stuff on Ebay/Gumtree to pay against your highest interest debt. Then recalculate your income and expenditure to see if you have any surplus you can use to reduce your debts. Once you have your surplus, allocate $50 a month to an emergency saving account (which you should keep with a bank you don't owe money to). This is so that when something arises, say your car breaks down or something, you won't have to go back into debt to fix it, you will have the funds on hand.
 
Allocate the remaining money against your highest interest debt. Compound interest works in favour of those who are saving but works viciously against those in debt. Therefore always tackle the highest interest debt first so that you don't accrue unnecessary interest. When you have paid off the highest interest debt, allocate the money to the next highest debt till it is paid and so on.
 
Step6
 
Some people will not have a surplus with which to pay off debt even after diligently doing steps 3 and 4. If you are in this situation, write to the lenders concerned, enclosing your new income and expenditure statement (the one after you have reduced your spending), and ask them to freeze the interest and then make them an offer of a monthly payment that you can afford. Some may refuse, but most will be worried about outright default and relieved that you are making an attempt to get on top of things, and agree to your proposal. There are debt charities e.g. Consumer Credit Counselling Service who can help negotiate this on your behalf. If you have massive debts but have lost your job and have no income, you may have no choice but to go bankrupt.