Continuing deep into January with New Year resolutions, we arrive at that point where the first pay cheque appears for many with just enough to cover the bills from Christmas.
You will have people around you in this situation. Be kind and point out there is a way out.
People make many mistakes with money and it’s no surprise given it’s not taught at school.
There is often shame attached to ‘mismanagement’ of money and the bills mount up, eventually becoming overwhelming. Its normal, its common, but we need to act. Every step in the right direction is an internal sign of hope, whether its debt, investments, or pensions. And trust me, it’s ok and normal to be overwhelmed.
January is often miserable for many, with the extra few pounds to shed, dark awful weather, all the tinsel is down and there isn’t much in the account.
With any resolutions we need to make the goal achievable. Here it is - all we need to do in each of the above areas is simply focus on ending each day better than the previous one, every day.
With interest rates at much higher levels than other years, paying down expensive debt is a priority now.
Resolve to overpay all credit card debt and look where possible to consolidate that quickly. A common thought is to think that adding credit card debt to a mortgage is a no-no and a bad thing. The downside of adding it is that the credit card debt is not currently secured against the property, whereas when added to the loan it is.
People get into trouble financially because they cannot cashflow themselves and exorbitant debt can be a killer for cashflow, especially at high interest rate levels.
For example, the average credit card rate is now over 30 per cent. Mind-blowing. Today, the Nationwide has aggressively priced in their mortgages at 3.84 per cent, well below the Bank of England base rate and a direction we said well over a year ago would occur. One of those rates is 690 per cent more than the other.
A person with a credit card debt of, say £10,000 would have to pay £3,000 per year to just keep their debt at the same £10,000. If that debt was added to a mortgage or secured/unsecured loan the rate would be significantly cheaper and the excess saved could be used to pay back the debt owed. At 3.84 per cent with the Nationwide for example, the interest payment would be £384 which is £2,616 per year. If that interest saved was used to repay the capital it would be paid off in its entirety in just over 3.5 years.
If you apply discipline at that point, you could turn the corner to save that £3,000 per year.
Of course, the real goal would be to cut out unnecessary payments and purchases first, and we covered the psychology of that last week.
The cost of living has risen unnecessarily over the last 24 months and let’s hope moves to squeeze energy companies to lower prices pick up speed.
The average UK credit card debt is often underestimated, as it is taken as an average per household. Most households automatically have their card repaid at the end of the month and those numbers when added in bring down that average. The real average is probably significantly higher and those with persistent debt, higher still.
I often think of finances as control. We do control or they control us. Rates charged at over 30 per cent, aren’t from organisations who love you, so control them.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary mortgage meeting call my mortgage team on 028 6863 2692.
