Dealing with Debt
Debt is not good or bad - I really cannot stress this enough – I meet so many people who feel ashamed around debt, if this is you please do not use debt as a way to beat yourself up or judge yourself. Maybe past you made some decisions that didn’t turn out so well, maybe past you invested in something that didn’t quite work or maybe you’ve just had some life circumstances that brought you to where you are now.
People talk about good debt and bad debt as if it has some kind of morality attached to it, it doesn’t, where it came from is not relevant – having a plan for your debt (one that works for you) is what’s important.
So there’s a couple of things I think are really important –
Understanding interest costs (because it’s important to know how it works)
How to pay off debt
Making decisions about using debt in the future.
Understanding interest costs
The easiest way is by an example:
Let’s say John has a £2,000 credit card balance – and the interest rate is 19.9%
If John makes only the minimum repayments, it will take him a whopping 24 years and 4 months to pay this off!
Over that time John will pay back a total of £4,853.
That’s £2,853 in interest.
The minimum repayments would start at approx. £50 but decrease each month as minimum payments are calculated as a percentage of the balance.
Quick Hack - Fixed Repayments
If John fixes his repayments at £50 a month instead of minimum repayment he would pay it off in 5 years and 3 months and save himself £1,745.
Here knowledge is power!
You can use the Barclaycard Repayment Calculator to work out for yourself how changing your repayments could save you money.
How to pay off debt
There are a few ways to make paying off debt easier.
For some people this part might be terrifying but trust me when I say that not looking adds to the fear and the emotions that you have around money. Once you have it all laid out in front of you are in a position to make decisions about how to move forward and that gives you control.
STEP 1: Make a list of all your debts, who you owe, how much, what the interest rate is and the minimum repayments due.
STEP 2: Choose one debt to ‘attack’ Here you have the choice of two methods:
Debt Snowball – pick the debt with the smallest balance and clear that first. The advantage here is that you get the pay-off of seeing your progress, by paying off the smallest debt you will feel like you have achieved something.
Debt Avalanche – pick the debt with the highest interest rate and pay that off first. The advantage here is that you will save yourself more money as you are paying off the most expensive debt first.
STEP 3: Set all other debts to minimum repayments only.
STEP 4: Overpay whatever you can to clear the debt you are attacking.
STEP 5: When that one is clear choose the next one to attack.
How much should I pay?
Working out how much you can afford will probably require you do a review of your current finances. Get really clear on what your income and outgoings are.
Then work out how much you can afford to repay off your debt.
Once you have this figure work out what that is as a percentage of your average income.
Then every month use this percentage to work out how much you will pay off.
Let’s look at an example:
Jane earns £3k a month on average.
She works out that she can afford to pay £300 a month towards debt (10%)
After a really great month Jane realises her income was £5k giving her an extra £2k of that she could potentially use to pay off a chunk of her debt but can’t decide what to do.
Here are the options:
- Pay the whole £2k towards the debt – this will clear the debt quicker. The downside is that it could feel very restrictive and like Jane isn’t feeling the benefit of the success or having any cash to re-invest.
- Using the 10% figure from above Jane would pay £500 off her debt (£5000 x 10%) which is an extra £200. The other £1800 can be split up for other things, saved, invested or spent.
Having a structure in place helps us avoid any ‘should’ feelings that come up around the extra income or having to go through a whole decision making process every month, which can be exhausting.
Choosing which option to go for depends on various factors and you need to take them all into account for yourself:
How much is the debt costing you?
Would being free from debt clear up some head space?
Have you restricted your spending in the past, how did it feel/what was the impact?
What other priorities do you have going on in your business and life?
This method of slicing up your income into percentages is how I manage both my personal and business money. You can find out more about my personal money management method in my course Making the Most of Your Money.
Choosing to borrow/take on debt
You can probably guess what I’m going to say – it’s up to you whether you choose in the future to borrow money whether that is personally or in your business.
I do have some questions to help you reflect and choose.
How much do you intend to borrow?
What will it cost you overall (as in how much will you end up repaying in total?) You should be able to find this out from the lender
Can you make early repayments without incurring a penalty?
Is the money for something that will potentially bring in money in the future? (An investment property | Stock that you will sell on for a profit | Machinery that will increase production | Staff etc)
Does what you are planning to spend the money on fulfil your needs right now? In what way?
Do you have a clear plan of how you will repay and by when it will be paid off?
Can you afford the repayments based on your current income and expenses?
Can you think of 5 other ways to get the money that you need? (not that you should – but thinking outside the box is useful)
If I gave you that amount of money tomorrow – is this the first thing that you would spend it on?
Is this the cheapest option in terms of borrowing?
A final note on debt
If you do find yourself in a position that you are unable to pay your debts it is important to seek advice as soon as possible. Do this before it becomes an issue.
In the UK there are many charities that can help such as:
Step Change: https://www.stepchange.org/
Citizens Advice: https://www.citizensadvice.org.uk/debt-and-money/
Debt Advice Foundation: www.debtadvicefoundation.org
Hi there, I’m Gail Bainbridge. I am a Small Business Money Expert. My blogs contain advice that I believe is helpful to small business owners in running their businesses. I hope you find them useful!
If you have a question thats more specific or you want advice tailored to your business I run Small Business Money Club where you can get my expert one to one advice and support for your small business every week.