How far to cut back?

At first sight, this is the classic hard and quick or slow and easy choice.

If you are snowballing or in a DMP, then not having that latte every morning on the way to work will save you nearly £500 a year so your debts are going to be cleared quicker.

For real ‘non-essentials’ this makes a lot of sense – check out MoneySavingExpert’s Demotivator Calculator!

The problem comes when you look at cutting back on things which are more important. You might decide that you have a wardrobe full of clothes so you don’t need any at all – but if it is going to take many years to clear your debt then this isn’t realistic.

Saving money is like dieting – crash diets fail and so do unrealistic budgets. The tortoise may go slower but the hare never gets to the end.

So you have to budget a sensible amount for clothes, entertainment, presents etc even though in theory you could put Zero against all of them.

“Managing on Zero” might be a good idea to kick-start your debt plan. As Smarter Budgeting notes, if you can manage without any new clothes for 6 months, you could put the money into an emergency fund.  But in the long run you are setting yourself up to fail.

Make sure your budget is realistic

I suggest you draw up a what you think is a realistic bare minimum budget and estimate how long that would take you to clear your debts. Then make a menu of extras you would like to add-on:

• £20 a month for Saturday morning football club for your son,
• an additional £20 a month on clothes,
• £30 a month extra for petrol to allow you to have a couple of days out or to visit relatives,
• £30 a month for some wine,
• £60 a month for a takeaway every Friday night,
• £40 a month for Sky etc.

Together they are adding up to thousands in a year and you probably shouldn’t be affording them, but adding one or two may only postpone your debt free day by 6 months and may make your life a lot more pleasant.

One approach that works for many couples is for each to have some personal money that they can spend each month without having to account for it to your other half – she thinks his gaming is childish, he can’t see why she needs more make-up…

Another option is to add a small slush fund each month which you aim not to spend. If you succeed then you can spend it the next month on whatever you want. If you get some ‘windfall’ income, you could look at paying half off your debts and adding the other half to the slush fund.

Emergency fund

Your emergency fund money is NOT a slush fund. If you don’t spend any of it one month it needs to be put aside for when an emergency does arise.

Think twice before trying a “hair shirt” budget

If you are still tempted by the hair-shirt, no luxuries at all approach and you live on your own, then obviously you could give it a go.  If you are a couple, then you have to both be dedicated to this idea.

If you have children then you have to think whether it’s fair on them. Obviously their lives will not be ruined if you give up Sky sports so they can’t watch the football. But if you are planning for the next five years not including any money for pocket-money or school trips and they are coming up to being teenagers, then you probably need to think again.

If it all ends in tears after a couple of months, try falling back to a realistic budget, one with a few “extras” built-in. Don’t treat yourself as a failure and give up on the whole idea of budgeting.

If you can’t afford a realistic budget

If the only sort of budget that balances for you has nothing in it for long-term essentials such as clothes or no money for entertainment then you need to get help with your debts:

• if you were planning on snowballing the debts, then you don’t have enough money for this and need to consider a Debt Management Plan or your other debt options..
• if you are already in a DMP, then you need to discuss your budget with your DMP firm as it is possible to get your DMP payments reduced.
• if you don’t have enough money to live on even if you don’t pay anything to your debts, read the section on Emergency Budgetting.

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