Some people will have overspent, while others may have been through relationship breakups over the summer and have no idea where to start to dig their way out of debt or cover ongoing costs. Photo / 123RF
Some people will have overspent, while others may have been through relationship breakups over the summer and have no idea where to start to dig their way out of debt or cover ongoing costs. Photo / 123RF
Opinion by Diana Clement
Diana Clement is a freelance journalist who has written a column for the Herald since 2004. Before that, she was personal finance editor for the Sunday Business (now The Business) newspaper in London.
There are two ways to tackle debt - the snowball and the avalanche approach
Budget advisers can help people come up with a plan and get debt under control
New Year, new debt problems. It’s been a tough couple of years with mortgage repayments sky-high and price increases on almost everything. When the New Year dawns, it’s often a time of increased financial strain.
Maybe those buy now pay later repayments from Christmas arehitting hard, or for some people, the fact that food banks have closed down, or that children aren’t being fed at school, is causing a crisis, said Heather Lange, manager and budget adviser at Family Finances Service Trust.
The trust is one of 180 budgeting services across the country that come under the banner of MoneyTalks. There are also programmes such as Debtfix and CAPMoney, which help people with debt and budgeting problems.
Advisers and mentors such as Lange are often contacted by people in the New Year who don’t know how they are going to pay for essentials. Some people will have overspent, while others may have been through relationship breakups over the summer and have no idea where to start to dig their way out of debt or cover ongoing costs.
“The first thing I would say is, it’s great to have identified this,” said Lange. Sometimes people find ways to disguise their financial problems from themselves.
“We [as a society] have more and more ways of delaying that awareness,” said Lange. “The whole invention of buy now, pay later means a lot of people are not having to work out how to afford things anymore. [Buy now pay later] can be a great budgeting tool, and I’m sure many people use it well.
“But when you’re using products like that, and you’re not at the stage yet where you want to admit that you’re spending more than you’re bringing in, it just gives you more time to make the hole bigger.”
That’s one of the reasons a lot of budgeting clients engage briefly, then disengage almost immediately. “It’s probably about being ready to identify what’s happening, and sometimes that’s too uncomfortable right now,” she said.
Once people do re-engage, an adviser can then drill down and see how big the hole is. “We can then look at the steps [someone] can take right now to cover those ongoing costs.”
Clients have control over some outgoings, said Lange. “For example, you’ve got your kids off on holiday and they may be thinking that everybody else is getting to go to the movies, or the zoo, or has got a new cell phone for Christmas or laptop before the start of the year. It’s about identifying some of those things that feel like you have no choice but where you actually do. The one good thing about the cost of living crisis,” said Lange, “is that it has made it socially acceptable to say that you can’t afford things”.
The adviser will look at what the upcoming costs are and what someone can actually afford. “Finances is just maths,” Lange added.
Cost of living price rises have made it harder to budget for the family. Photo / 123RF
Sometimes there is enough money coming in, but the client doesn’t know how to manage the money. “That’s one of the nicest situations we get in our work,” she said. It means the adviser can help find a solution. “Then it’s about tracking what you spend and being mindful of it. It’s very similar to our eating.”
A budget allows clients to allocate money to bills and debt repayments, which will need to be started at some point. Lange said she generally recommends clients use the debt snowball or debt avalanche method to start tackling their debt.
The debt snowball method involves paying off debts from the smallest balance to the largest, building momentum as each debt is cleared. The debt avalanche method focuses on paying off debts with the highest interest rates first to save on interest costs over time.
That’s all assuming there is enough money coming in to start with, said Lange. Where there isn’t enough money to pay essential outgoings, it’s a different story. A client may have just found themselves suddenly single or unemployed, with massive outgoings.
“If there is just not enough [money coming in], there is Work & Income for grants and food banks. Your budget service can help you negotiate with the people you owe money to,” she added.
Creditors are required to consider hardship applications and follow a specific process. They might consider extending the term of the contract to reduce the amount of each payment, postponing debt repayments, or both.
