According to ITV News, 11% of UK households were going into debt or increasing existing debt to afford Christmas last year. It can be easy to get carried away at Christmas and spend more than you can afford, but what happens if you have gotten yourself into debt?
Christmas Overspending
According to the Bank of England, the typical household spends almost £740 more in December, acting as 29% more than in other months.
In fact, households were estimated to spend £823.40 on Christmas this year, with many relying on credit to afford it, including 4% turning to general loans, 2.9% using payday loans, and 3.2% turning to family or friends for a loan.
Getting Out of Debt…
If you’ve gotten into debt, it’s very important to get out of it, but this can sometimes seem impossible. Debt can be incredibly overwhelming, but burying your head in the sand won’t make the problem go away. In fact, more often than not ignoring your debts will only make them build.
A good place to start is to:
Make a list of everything you owe and to whom
Work out which of these are priority debts, where serious action can be taken if you fail to make repayments, such as gas and electric bills or mortgage arrears
Create a budget to figure out where spending can be reduced to help you work out how much you can reasonably repay to your creditors
Now it’s time to get advice… you can click here for a list of free debt advice organisations
The solution to your debt will be specific to you. It will depend on what type of debts you have, how much you owe, and how much money you can pay towards those debts.
Debt Solutions
There are a variety of debt solutions out there. You can read more about these on StepChange’s website, but here is a quick overview:
Administration order- a legal agreement arranged by the County Court between you and your creditor to make repayments
Arranging payments with creditors
Bankruptcy- a legal process undertaken which writes off unsecured debts when you are unable to repay them within a reasonable timeframe
Debt arrangement scheme- a scheme set up by the Scottish government where you repay your debts with affordable monthly payments without the threat of court action
Debt consolidation-when you borrow enough money to pay off all of your different debts so that you now only owe money to one lender
Debt management plan- an agreement between you and your creditors to pay all of your debts in affordable monthly payments
Debt relief order- where your debts are written off 12 months after the debt relief order is approved, providing you owe less than £30,000 and meet the other eligibility criteria
Individual voluntary arrangement- a formal agreement set up by an insolvency practitioner to make payments towards your debts via a lump sum payment or a 5 or 6 year repayment plan
Insolvency- usually used when referring to businesses, this is where you can no longer afford to make debt repayments. You are insolvent if you file for bankruptcy
Minimal assets process- a way of writing off debts for those with a low income with very few assets
Protected trust deed- a formal agreement to pay part of what you owe to creditors via affordable monthly payments, often over a 4 year period
Releasing equity- accessing the cash tied up in your home to help pay off your debts. You can read more about equity release here
Remortgage your home- where you take out a new mortgage on your home to pay off debts by either releasing equity, or reducing your monthly mortgage payment
Selling assets- where you sell something of value to have more money to pay towards debts
Surrendering your property- selling your home to find cheaper housing to have more disposable income for debt repayments
Settlement offers- where you offer your creditors a one-off payment to clear your debt
Sequestration- a form of insolvency in Scotland
Temporary repayment plan- where you make small monthly payments towards your debt
32% of UK adults said being unable to pay the bills had made them anxious in the last two weeks
15% said job insecurity or unemployment made them feel anxious in the last two weeks
20% of UK adults said debt had made them feel anxious in the last two weeks
The Office of National Statistics also discovered adults who were behind on energy bills between 14thSeptember and 8thJanuary 2023 were more likely to report:
High levels of anxiety (49% compared to 33% of those not behind on energy bills)
Low life satisfaction
Low happiness
Feelings that things done in life are worthwhile
“There are clear links between financial strain and poor mental health and for people experiencing both they are faced with a double taboo. We don’t like to talk about money matters and the perceived stigma about mental health is stopping many of us from talking about our problems” – Mark Rowland, Chief Executive of the Mental Health Foundation
“It’s no surprise to see that the cost of living crisis has become a serious source of anxiety for many people across the UK, who are starting each day worried about how they’ll make their finances stretch. Talking about your mental health can be daunting at the best of times, but money problems can seriously compound those difficulties and can add another layer of shame that makes it harder to deal with”– Helen Undy, Chief Executive of the Money and Mental Health Policy Institute
Limiting Financial Stress
One thing that can significantly reduce financial stress is having a safety net of money in case your financial circumstances change, such as losing your job or your bills going up (as they always do!) This helps to reduce the pressure that comes from living payday to payday, worried you will get behind on any bills.
Of course, it should certainly be acknowledged that saving money can be a huge struggle for some people, especially those who have very little, if any, money left over at the end of the month to save, and also for individuals who were never taught how to budget or look after their money. For the latter, this is where meaningful financial education could really make a difference, and it is an enormous shame that this is not supplied properly in schools.
Sticking to a budget and keeping an eye on your bank statements and payslips can also help to reduce financial stress. Having a clear idea of where your money is going every month is essential if you need to find a way to reduce any spending and having a budget will help to establish what you are spending on and saving for. Sticking to a budget doesn’t mean you have to live miserably and never do anything fun. Rather, it means you can affordably set money aside for any of those meals out or shopping trips without worrying about overspending.
Debt is a huge cause of financial stress and anxiety, as can be seen from the Mental Health Foundation’s statistics. For those experiencing problem debt, getting help is imperative. Free debt advice can be found from any of the websites below, which is a great place to start:
I must stress the importance here of getting help, as burying your head in the sand and ignoring the bills as they come through will only serve to make the problem worse. You should not feel ashamed about being in debt, and you should not expect that it has to be like this forever, because it doesn’t if you work towards changing it.
Some key things to bear in mind to avoid creating or worsening debt are:
Avoiding payday loans, as their interest rates tend to be ridiculously high making it incredibly difficult to play catch up with what you owe. If you do choose to take out a payday loan, at least make sure that they are regulated by the FCA to avoid scammers
Avoiding Buy Now Pay Later Financing, as it encourages you overspending. A good rule of thumb is that if you can’t afford it right now, you can’t afford it at all
Paying more than the minimum repayment on your credit card. Try to pay your credit card in full and on time, every single time
Creating a debt repayment plan. One way of doing this is prioritising the debts with the highest interest rates first to slow down the growth of what you owe. See if one of those debt advice organisations mentioned above can help with this
Get talking! Tell a trusted friend, family member or colleague about your debt
Overall, financial stress is a huge source of pressure for UK adults. We need to ensure that we are having open and honest conversations about it to help reduce the stigma that comes with financial struggles and worries.
by Red Star Wealth
The Government has recently launched an 8 week public consultation regarding the regulation of the Buy Now Pay Later (BNPL) credit industry.
An Overview of BNPL
BNPL firms tend to offer short term interest free loans to enable customers to spread out payments for their purchases.
Because repayment instalments are free, BNPL financing can reduce consumers’ perceived risk of debt, encouraging them to spend money they don’t actually have.
BNPL financing is largely unregulated, with many consumers unaware of the potential consequences of missed payments.
The Stats…
According to Equifax, at least 15 million people in the UK currently use BNPL purchasing, with 1/3 of those spenders falling in the 20-30 age category.
Adobe Analytics found that purchases made using BNPL services made up 12% of online orders this January, compared to 10.7% in January 2022. We can clearly see that more and more consumers are turning to BNPL, seeking to spread the costs of their purchases due to being unable to afford them at the moment of buying.
The above graph, courtesy of Finder, illustrates the problems that arise with BNPL, with many turning to further borrowing to pay what they owe to these firms. This can be seen with 26% using their credit card to pay off BNPL purchases, 9% accessing their bank overdraft and 14% taking out other forms of loans (personal, payday and guarantor).
The Promise of Protection
Regulation of the BNPL sector has been discussed since 2021, so it is long overdue. As stated by Claer Barrett, author of What They Don’t Teach You About Money, “compared to the booming nature of Buy Now Pay Later, the pace of regulation has been glacially slow.”
As it currently stands, BNPL agreements involve minimal credit checks with a lack of requirement for lenders to supply important information about their loan agreements to borrowers. This enables consumers to get into a situation where they are borrowing more money than they can actually afford to repay.
This Tuesday, on 14th February 2023, ministers launched an 8 week consultation into the regulation of the BNPL credit industry. New proposals would mean BNPL products would be regulated by the Financial Conduct Authority, with consumers able to report complaints to the financial ombudsman.
Once given new powers to regulate the BNPL industry, the FCA will consult on rules for the sector to follow, such as mandatory affordability checks, licensing of operators, and fair marketing.
The Government has estimated that 10 million consumers could be protected from “unconstrained borrowing” as a result of these measures.
To access the consultation on this draft legislation of BNPL regulation, click here.
To read more about the dangers of BNPL purchases, check out this blog from our sister company.
by Red Star Wealth
As we are coming up to a new year, you might be thinking of making some changes to help improve your financial stability and happiness. Let’s have a look at some New Year’s Resolutions you can make to do so…
Prioritise my own Mental and Financial Wellbeing
Don’t stretch yourself too thin in order to please or impress other people. You are the main character in your own book of life!
Improve my Credit Score
A good credit score means you are more likely to be approved for loans and be offered lower interest rates on repayments. This resolution is particularly worth considering if you are thinking of getting something like a mortgage in the next few years. Some examples of steps you can take to improve your credit score are registering on the electoral roll and paying your credit card balance in full every month
Pay off More than the Minimum Payment each Month on my Credit Card
Even if you don’t pay the full balance, paying for than the minimum required payment is a good idea. This is because you reduce the amount of time you will be stuck making repayments and being charged interest. We talk more about credit cards on our sister company’s blog…
Increase my Pension Contributions
Pensions work on a system of compound interest so the earlier you start building your pension pot, the more it will be able to grow over time. If you are able to, increasing your pension contributions is definitely worth considering, especially if you are a woman… let’s close that gender pensions gap!
Build my Savings
Whether you’ve got something in mind you want to save up for or just want to create an emergency fund, savings are really important. LINK It sometimes seems impossible to save money because we think ‘too big’. For example, you might have a goal to save £1,000, but it seems unmanageable. However, when we break it down in terms of the amount we would need to save each week or month, it seems less daunting and more achievable. Maybe you could start by getting an un-openable tin money box, or enabling the round up transaction feature on your online banking if your bank offers this
Don’t open any New Credit Cards
Try not to increase your debt!
Tackle my Debt
Is 2023 the year of going debt free? One way of managing your debt is to pay off the ones with the highest interest rates first, in order to slow the rate of growth of the money you owe. It’s also worth checking out:
You are worthy and capable of achieving what you want in life. Keep working towards whatever that may be…
by Red Star Wealth
According to The Money and Pensions Service’s Financial Capability Survey, 11.5 million UK adults have less than £100 in savings and only 49% of people could last 3 months or more without borrowing money if they lost their main source of income.
Why Might You Struggle to Save?
It’s difficult to save money if you have any debts because you are tied into making repayments.
It’s also difficult to save when you don’t have a budget plan as it’s harder to keep track of your money. Budgeting can help you see where you might be able to reduce your spending and where (if possible) you can afford to put money into savings. Use our free budget calculator through our sister company’s website if you need some help making your budget!
It’s hard to save money if you have a habit of overspending. It can be easy to spend beyond our disposable income, especially at times like Christmas…
The Cost of Living Crisis
UK savings will likely only decrease in continuing months. This is because many people cannot afford to save money at the moment, giving the huge inflationary pressure on living expenses.
You can only afford to save money when your expenses are more than your income. Therefore, many people might see their savings slowly being depleted, the growth of their savings coming to a standstill, or their savings’ growth slowing down.
Why is Saving Money so Important?
It enables you to achieve your financial goals
You can form an emergency fund for any unexpected expenses. This in turn gives you security and peace of mind as the emergency fund acts as a safety net so that you can afford to cope with the unexpected
It can help you avoid taking out credit, protecting you from entering a cycle of debt. This point is particularly true when considering how many people turn to things like payday loans when they have unexpected bills
It means you can accumulate wealth, which is good if you want to do something like channel money into an investment
It helps protect your credit score as you can make payments on time
If saving for a house, it means you can put down a bigger deposit, meaning you will have a smaller mortgage with more competitive interest rates
We know that it can be really difficult to save money when the price of everything constantly seems to be on the increase. Sometimes saving is not a viable option, as you may simply not have any spare cash to put away. However, if you are able to, building your savings is certainly worth considering…
by Red Star Wealth
Though the Bank of England has not officially predicted a recession later this year, it is looking increasingly likely. This is due to the huge increases in the rate of inflation and the labour shortages continuing from Brexit and Covid. Here are some ways of preparing your personal finances in case a recession takes place.
Save, save, save
It may be a good idea to start building up your savings account, wherever possible. Having a strong emergency fund means you are prepared for unexpected costs. You never know what’s round the corner so it is best to prepare for the worst and expect the unexpected.
For example, your income may reduce from either losing your job or having your hours cut down due to less consumer demand in the economy. This would make essential payments harder to deal with, especially those arising out of the blue, such as your car breaking down or your bills rising (the latter being incredibly likely at the moment).
Go Debt Free
Try to pay off existing debts wherever you’re able to. Consider making a debt repayment plan… this could involve paying off priority debts first, before focussing on the ones with the highest interest rates in order to save money on interest repayments.
Priority debts are things like gas and electric bills and mortgage arrears (missed mortgage payments). These debts should be prioritised as they have the potential to cause the most issues, such as having your electricity cut off, or losing your home.
Avoid taking on any extra debts as you don’t want the amount you owe to become unmanageable
Shop Around
You can try to reduce your expenses by switching to cheaper options. Even though switching accounts can be a pain, it’s worth it in the long run.
If your weekly shop costs a bomb, maybe try to find a cheaper supermarket and cut down on certain luxury goods. If there’s ever a time to be frugal it’s now.
Avoid Investment Panic
Don’t let panic affect your investment choices. You shouldn’t let emotion cloud your judgement. Your investments dropping in value in the short-run during a recession does not mean they lack long-run profitability. For more info on this, check out this previous blog on the importance of long run investment.
It’s also worth considering diversifying your investments now so that one industry facing a decline during recession doesn’t sink your whole portfolio.
