A game of snakes and ladders with its ups and downs is a pretty good analogy for clearing debt – each month you should move at least one square forwards, repaying some of your debt. So what can you do to avoid the snakes, or maximise your chance of getting on a ladder? Here are three things to look at:
1) Get an emergency fund
This may seem counter-intuitive: if you pause to save up an emergency find at the beginning, it’s going to take longer to get to the end you might think.
But that’s not how it works in practice. Without an emergency fund, you can find that you are going down snakes most months and never getting anywhere, as the least problem derails you. With a small emergency fund, life gets a lot less stressful – suddenly a bad month is more like “missing a turn”, you don’t make any progress but you aren’t slipping back down.
Have a look at Save an emergency fund or pay off debts? and think if one would help you. Facing a big problem such as having to replace a car, you won’t have enough saved up… then you may have to borrow more and you might be glad if you have saved your emergency fund in a credit union, as the interest rate will be better.
2) Be realistic about your budget
If you find you are dipping into your emergency fund most months, that’s usually a sign that your budget isn’t realistic. For example you shouldn’t need to use your emergency fund in December for Christmas expenses, because Christmas happens every year at the same time, so you could have budgeted for it.
And if you have little or nothing in your budget for entertainment, clothes or car maintenance, then you are asking for trouble. You may get through a short period not spending anything here, but if it’s going to take you several years to get out of debt this isn’t going to work. Lots of people blame themselves for “lack of will power” when they can’t stick to a budget, when actually it is so tight that nobody could.
If you are worried that allowing for these sorts of ‘extras’ will mean it will take too long to pay off your debts, then you may need to consider other debt options – read Slow Snowball or a Debt Management Plan?
3) Use your budget to actively make decisions
If you have set a realistic budget, you have a small emergency fund and you are still slipping down those snakes too often, the problem may be that you aren’t keeping to your budget.
A single person with no children who is good with figures may be able to carry their budget in their head, knowing how much of this months groceries and clothes allowances have already been spent. But if your life is more complicated, and especially if you have a partner, then it might be a good idea to look at switching to a more active approach to budgeting, so you can easily check before you purchase something if it is within this months limits.
Don’t give up!
Clearing a lot of debt is always going to take a while and, unless you are very lucky, there will be a few problems along the way. So don’t give up if you hit a few problems, or if it all seems to go very slowly at the start. As time goes on, more of your monthly payment will be going to clearing the debt, not just paying off the interest, and then things should start to speed up. Keep an eye open for ways to improve your finances as well!