After months of negotiations with members of the Cabinet, Chancellor George Osborne is set to release the 2015/16 spending review. To balance the nation's book, Osborne seeks to cut government spending by £11.5 billion.
Sir Mervyn King, the Bank of England's outgoing governor, says he believes low interest rates should remain in place to assist those UK citizens who are deeply in debt.
Smart Financial Planning's Steve Martin offers this advice for individuals who want to restore order to their finances and get out of debt.
Prepare a Household Balance sheet
According to Martin, consumers should run their household similar to a business with the primary goal of paying down any unsecured debt. Consumers should pay off the debt that is costing them the most first. This includes high interest credit cards. One option is to transfer credit card debt to cards offering 0% interest. Some cards may charge the consumer up to 3% to transfer the money but this is worth securing payments with no interest. After transferring the money, continue making the same payments to pay down the balance sooner. Consumers should discontinue use of the card and throw it away when the balance is paid off.
Analysing Big Debt
For most households, the mortgage represents the biggest debt. Overpaying on your loan by a small amount every month will reduce the interest paid and decrease the term. Martin points out that any business carries debt for a reason but manages that debt with a sustainable repayment strategy.
A consumer with £400,000 in assets and a mortgage of £300,000 is better off with £100,000 of assets and no mortgage unless there is a specific use for the money. Most people will not find this to be helpful if they are struggling day-to-day, so Martin advises chipping away at the mortgage.
Put Money into Savings
All businesses have to pay employees. If you consider your household to be the business then you are the employee. Your income should go to pay monthly bills but some should be put into savings for the future. If you need more income, you should work harder to receive a promotion, take night classes or find a new job that pays more.
Consider Long-Term Strategies
You have to look to the future and decide what you want. If you want to quit working at some point, you must have an effective way to replace your income. Most people fail to consider the future consequences of current actions. One mistake many consumers make is eliminating protections policies that pay if they become too sick to work, become redundant in the workplace or die.
Martin says consumers who have £100 spare should pay insurance policies first then plan for retirement and put money away for savings. Consumers should save any money left over after paying insurance for the long-term.
If a couple has a 30-year plan and one partner dies but has no insurance coverage, the plan will not work. As long as insurance coverage is in place, the long-term plan will be successful.
About the author: Jonathan Matthews is a senior debt advisor for a leading company called Debt Legal. He assists the public with any debt issues they may have, giving them advice and guidance on how they can become debt free.