Financial expert reveals the EASY system to pay off debt that will change your finances

warren shute

Warren Shute said the ‘snowball effect’ clears debt fast (Image: warren shute)

I’ve been studying and fascinated by psychology for almost as long as I’ve been a money man.

I think the two go hand in hand in so many different ways – and that’s especially true when it comes to debt. When you’re in debt it can feel like there’s nowhere to turn and no way out.

That’s why I have a process that differs from most others when it comes to debt repayment, because it focuses on keeping you engaged in the process and feeling good as it progresses.

It puts you back in control of your money. I call it the Snowball System because you just keep building more and more momentum.

Setting yourself up for success

Making a plan is just as important for someone who’s in the red as it is for someone starting a business. If you don’t know where you’re going, you won’t get there.

You wouldn’t start driving without a destination in mind; money is exactly the same. If you don’t have any rules or boundaries, it will do what it wants.

Money is very powerful because it’s emotional, so paying down your debt is all about changing your mindset and saying ‘OK, I’ve not had any criteria in the past but that doesn’t mean I can’t start now’. It’s about what you decide you’re going to do.

If you do what you’ve always done, you’ll get what you’ve always got. You have to make decisions from a different place.

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Make a plan to get finances sorted (Image: getty)

Getting organised

You can download a debt organiser spreadsheet for free in the resources section of my website, warrenshute.com, which shows you how to put all your debts, income and expenditure in a clear format. Be brave, it’s an important place to start.

Once you’ve done this, you must find a way to make sure that what’s coming in is more than what’s going out, that there’s a surplus at the end of the month.

You need that surplus to be at least 12.5 per cent of your income – that’s one hour of an eight-hour working day, so the first hour of every day goes to paying yourself.

If your surplus isn’t 12.5 per cent, you have two choices: reduce your expenditure or increase your income.

For the first, you’ll have to make sacrifices.

I work with people who say they can’t cut anything from their budget, but then we go through their expenses and they’ve just got a new iPhone for £50 a month and they’ve got Sky costing them £60 per month.

Go through each of your expenditures and ask yourself three things:

1.     Do I need this?

2.     Do I want this?

3.     Can I get the same experience cheaper elsewhere?

spotify

Make sacrifices to clear your debts by cancelling some monthly subscriptions (Image: getty)

You can also use sites like uSwitch to make sure your utilities spend is at a minimum, and make sure any insurances are at the lowest possible rate using comparison sites.

Increasing your income can be achieved through the use of payment clubs like Top Cashback or Quidco, which can give you rewards on your normal shopping habits; voucher sites like Vouchercodes.co.uk can help too. You might also take a part-time job.

However you do it, you really need to make sure that you have 12.5 per cent of your gross income going to you to help you pay off your debt.

Next, look at your assets and liabilities. You should have at least £1,000 in reserve for emergencies, but other than that, all other money you have elsewhere, you’re better off using it to pay down your debt with current interest rates being so low.

You can also look at reducing the rates of interest that you’re paying, via an interest-free credit card balance transfer or lower rates of loans. There are lots of comparison sites out there.

On the free organiser spreadsheet there are links to different providers to help you with this.

My Snowball System

Now you know exactly what’s going on, organise the debts on your spreadsheet in order of balance from smallest to largest. Ignore the interest rates, just order them by balance from low to high.

Now it’s time for my Snowball System. Here’s how it works: you pay the minimum payment on each card or loan you have, and then pay your extra 12.5 per cent, all your surplus, towards the smallest balance. All your focus and attention should be on paying that smallest balance off.

paying bills

Use a free organiser spreadsheet (Image: getty)

Why? To get a quick win, a dopamine boost. When you get that smallest balance paid off, you’ll start feeling good about the process and like you’re making progress.

Once your smallest balance is gone, congratulate yourself – you’ve achieved something great. Then switch your focus to your new smallest balance: carry on paying the minimum off your other debts, and pay all your surplus onto that one.

Repeat this and you’ll get rid of your debts one by one, each time feeling that little bit freer. Momentum is huge in our decision-making, and the Snowball System continuously builds it.

I respect that debt repayment is easier said than done and it’s an emotional journey, not a logical one.

Use some of the FREE tools on my website, connect with me on Twitter or Facebook, and I’ll walk that journey with you. This is about long-term planning, not a quick win, and I’m here to help.

Warren Shute was named the UK’s Financial Professional of the Year (2017) and his first book, The Money Plan, is now available on Amazon.  Get more money tips at www.warrenshute.com. @warrenshute

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