8 steps to debt-free living

Borrowing money is a part of life for many of us. But it doesn't have to be this way. Here's how to escape debt once and for all.

Not all debts are bad. Mortgages, for instance, are a necessity of modern life. But building up heaps of debts for other reasons is not a good idea.

If ever there was a good time to clear your borrowing once and for all, now would be it. We're in the middle of a recession, so it's vital you get your finances as robust as they can be. Here's how...

1. Spend less than you earn!

This is my number one financial lesson, and it was the first post in my 'what not to do with money' blog here on lovemoney.com.

Living within your means is the key to financial success, and although it may sound obvious, many of us are guilty of over-spending every now and then. And some of us even more regularly than that! You need to start separating essential expenditure from luxuries. If there's not much left in the kitty after the bills have been paid, then I'm afraid you'll have to cut the luxury spend.

2. Stop paying interest on your debts

One of the best ways to get on top of your debts is to make them as cheap as possible, and that means making sure they're interest-free. For instance, if you have credit card debt, shift it onto a 0% balance transfer deal right away. This will give you some breathing space while you chip away at your balance.

The current market-leader is the Virgin Money Card which offers a fantastic 16 month interest-free period. Try your best to clear the balance in 16 months. If that's not affordable, pay as much as you can and be prepared to move your remaining debt again if you have to another 0% card. (Don't forget, you'll be charged a 3% transfer fee.)

3. Wave goodbye to your overdraft

Did you know some credit cards can also help you get to grips with your overdraft too? Take a look at Wipe out your overdraft forever!, which shows you two smart ways to dodge paying interest. The first is to pay off your overdraft using a 0% credit card (but only a select few will allow you to do this). Luckily, money can be transferred from your Virgin Money Card into your bank account to get it back in the black instantly. You'll then enjoy the same 16-month window to pay it off (subject to a 4% money transfer fee).

Alternatively, the second option involves switching your current account to a bank which offers an interest-free facility and allows you to take your overdraft with you. There are a few accounts which are perfect for this, including the Alliance & Leicester Premier Account and the Alliance & Leicester Premier Direct Account which both offer a 0% overdaft for 12 months. It's a similar story with the Abbey Bank Account - Preferred Overdraft Rate which matches your existing overdraft borrowing up to £5,000 (depending on your circumstances) for a year too.

4. Snowball your debts

If you can't move all your debts onto interest-free deals, make sure you 'snowball' them. This means you pay as much as you can afford off the most expensive debt first, while paying the minimum amount required on the cheapest debts. As the most expensive debt is cleared, you then attack the next most costly so your repayments are gradually snowballing on each successive one. Keep repeating the exercise until they have all disappeared!

5. Get free debt advice

Sometimes debts can get a bit out of hand. Don't be too proud to ask for help if you feel overwhelmed. There are numerous excellent debt charities where you can get expert advice, for free, such as Advice UK, Citizens Advice and National Debtline.

Citizen Advice, for example, may be able to speak to the companies you owe money to on your behalf and negotiate more manageable repayment plans so you can get your finances under control again.

6. Think twice about debt management companies

Debt management companies effectively take over your debts so that you only make one repayment to them, while they deal with your creditors. Having a third party to manage your debts may sound appealing, but you'll have to pay a fee for their services. I suggest you speak to one of the free advisory centres first, and only resort to a debt management company if you really have no other choice.

7. Start budgeting

Once you've got everything under control, it's time to draw up a proper budget and, most importantly of all, stick to it. I promise you this way it'll be so much easier to keep track of your finances, stop over-spending and prevent another debt mountain from building up. If writing a budget is a bit of an alien concept, read How to budget in five easy steps.

8. Live frugally

And finally, live frugally from now on. Not only will you stay out of debt, but you can save money in a million and one different ways. Make sure you check out the latest discounts and deals in our regular weekly Frugal Friday and Frugal Food articles. And don't miss the many money saving tips on lovemoney.com and in our Frugal Family blog. Once you've got the hang of a frugal existence, you should be able put away a bit of cash in a traditional savings account at long last too.

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