The Motley Fool

My 3-step strategy to cut debt and boost your savings

Is your overdraft causing you sleepless nights? Do rising credit card bills mean that you’re no longer able to spend and save your money in the way you’d want to?

Personal debt is often seen as a guilty secret, but it shouldn’t be that way. All too often it’s the result of an innocent and unpredictable set of events which left you short of cash, and deep in the red.

If this is you, then the most important thing is to do something — now. To help you get started, I’ve put together a simple three-step plan. Following this strategy could save you a lot of money and should help you to get your debts under control as quickly as possible.

What should you do first?

Gather together details of all of your borrowings. Overdrafts, loans, credit cards and store cards are the usual culprits. Make a list, with the highest interest rate debts at the top.

Interest costs are the toughest part of managing debt repayments. Rolling over interest payments to the next month can cause your debts to multiply. As a general rule, I would always focus on repaying the highest interest debt first. As your monthly interest payments fall, you’ll be able to repay what’s left of your borrowings much more quickly.

Keep track of your remaining debt at all times. When you can see that you’re making progress, consider starting to save. I’d target two-to-four weeks’ wages or a month’s salary initially. This will give you the safety buffer you need to deal with unexpected bills, without having to borrow money.

Get your timing right

The key to repaying debt or saving is to take the money out of your current account before you have a chance to spend it. Arrange for credit card or loan payments to come out of your account on the day that you’re paid. You can usually ring up the lender and choose which day you want your payments to come out each month.

If you’re putting money into a savings account, set up a standing order or direct debit to deduct the money automatically.

Don’t rely on using the money that’s left at the end of each month. There won’t be any. Money that’s left in our current accounts tends to get spent, despite our good intentions.

Start investing

Reducing your debts to a manageable level may take time. Once you’ve done this, I’d suggest you focus on building up a cash savings account with perhaps six months’ income. That way, if you lose your job or are unable to work for a while, you won’t plunge back into debt.

If you’ve done all of this and still have surplus cash available each month, then congratulations. You may now want to consider the idea of building some wealth by investing in the stock market. You’ll need to use money that you won’t want to access for at least three-to-five years. But the rewards can be considerable, especially with interest rates at record lows.

Regular payments of as little as £25 per month are possible with most providers. Opening a Stocks and Shares ISA and paying into a FTSE 100 tracker fund is a cheap and effective way to build long-term savings.

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