The number one personal finance tip is to live within your means.
Ensure the total amount of money you spend every month does not exceed how much you earn every month. If you are spending more than you earn, you run the risk of getting into unmanageable debt.
Unmanageable debt is when the cost to pay back debt becomes unaffordable and you are unable to keep up with repayments. This is dangerous and can affect your financial wellbeing and mental health so learning how to avoid this is vital to your health.
Let’s go through the top 4 tips to avoid unmanageable debt:
1. Create a budget and stick to it
Look at your month ahead and create a spending plan (a budget) on where you need and want your money to go.
By giving every pound a purpose, you ensure you are not spending more than you can afford. And if you do not have enough money to cover all of the things you need and want to do, it allows you to create a tangible plan to either increase your income or decrease your spending (or both!)
2. Practice mindful spending
We live in a world now where it is so easy to walk down the high street or go on social media, and end up spending money without really realising it. Impulse spending can lead to unmanageable debt if you are unaware or out of control of the purchases you are making.
Mindful spending involves becoming conscious of your bodily sensations and emotions and thoughts in the moment of spending money and asking yourself: “Can I really afford this right now?” and “Am I just buying this product/service right now to make myself feel better?”
When you are present with your emotions at the time of spending more, you can make financial decisions that feel aligned with your goals and values and budget!
3. Learn how to use a credit card responsibly
Credit cards can be incredible tools but only when you are confident in your ability to use one responsibly. It is not free money – you will always have to pay it back.
The best way to use a credit card is to set yourself a budget that you can spend within one month and pay off the balance in full the following month.
If you spend money on a credit card and then carry a balance over to the next month and you keep doing this month on month, the debt will quickly add up, leaving you with a bill to pay back that is much higher than you can afford.
If you want to find out more about credit cards, we’ve written a very useful post.
4. Be aware of using Buy Now Pay Later (BNPL) product
Buy now Pay Later Products might seem attractive at the time but reports show that many young people struggle to keep on top of BNPL payments.
In the UK, findings suggest that almost one-quarter of consumers are missing monthly payments (24%) and more than one-quarter are skipping payments at least every few months (27%). The reality is that over half are falling into debt through these schemes.
Before paying for a product or service using BNPL, ask yourself “why am I using BNPL right now?” and get really clear on your intentions to bring consciousness to this action.
And if you do currently have unmanageable debt and are struggling to make payments or clear the debt, then there are some incredible charities you can reach out to including StepChange and the Citizens Advice Bureau.