Debt series: How to stay debt-free after you pay off your debt

By Marianne Curphey

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If you've overcome a debt problem, you may be relieved but also fearful of falling into another debt hole. Once you've cleared your debt, how can you stay that way?

"If you have had a debt problem in the past it can be hard to get back on your feet," says Caroline Hamilton, a debt advice manager at the Money Advice Service.

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See the rest of the series

Check out the first instalment in this series, "Why we lie about debt" and the second instalment, "How to spot the signs of problem debt".

Here's what debt advice experts say you should do to get back on sound financial footing.

1. Keep your support system.
Debt charities say people on the journey out of debt benefit from having extra support and advice of a caring friend or family member, or a debt advice company.

This support also can help prevent them from slipping back into old ways of relying on credit when cashflow is tight.

According to research from the Money Advice Service, a government agency set up to give impartial financial information, debt advice can have a massive impact on people's lives.

Within three months of receiving advice, 65% are either repaying their debts or have repaid them in full, 73% feel less stressed about dealing with their finances, two-thirds (62%) are sleeping better, over half (55%) reported better physical health and 69% said their relationships improved.

2. Re-evaluate your budget.
One way to stay in control of your finances is to increase your earning potential, but this can be difficult especially if you are in debt and worried about bills, says Dan Britton, personal finance expert and founder of the Personal Finance Academy.

"It can be hard to be creative or have a positive attitude if you are worrying about money," he says.

A simpler option is to cut your costs.

"Budgeting is the cornerstone of good money management," he says. "It is important to have that awareness of where your money goes. For example, a £5 cup of coffee on the way to work every day could add up to more than £1,000 over the course of a year."

Other small but significant regular costs could be mobile phone contracts, monthly magazine subscriptions or gym memberships.

"It's about awareness of your spending and taking responsibility for your money," he says. "Budgeting can be liberating - it can make you feel in control and give you more choice about when and how you spend so that you prioritise the purchases and experiences that are important to you."

"There is little point in eliminating your debts if, within a short time, you are back in the same situation," says Michael MacMahon, author of Back to the Black, How to Become Debt-Free and Stay That Way. "Be aware of the difference between your monthly income and what you actually have left after paying all the essential bills."

He suggests:

  • Use cash instead of cards on a regular basis, while keeping a debit and credit card for emergencies.
  • Monitor your spending closely - consider analysing it for a month to see exactly where your money goes.
  • Shop around for utilities and be prepared to switch.

3. Change your money mindset.
It also can be helpful to look at your attitude toward money and how it might need to change for you to be in control of your finances going forward, says Jane Cox, an international human performance specialist and psychology of wealth expert.

"Money is an area in which we feel very vulnerable because it reflects a reality we often don't want to acknowledge," she says.

Whether we earn less than we would like people to know, can't manage a budget, make short-sighted financial decisions, or spend too much money on wants instead of needs, it leaves us feeling very exposed.

"That's because those decisions or shortcomings appear in black and white on our bank statements," Cox says. "We hug that information close so nobody can see into our weaknesses, since we aren't just worried about being judged financially, but worried about being judged generally."

Part of the problem comes from comparing ourselves to other people and their lifestyles.

"Money is just one of the many facets where we are constantly convinced that other people will be better than we are," she says.

4. Look to the future.
The first step is to acknowledge where you are now financially, Cox says. "You may want to earn more, but right now, what you earn is your reality."

Pay what needs to be paid first, and put money regularly into some sort of savings or investment. Try to build up a slush fund, and some emergency savings. It doesn't all have to be serious, either.

"Try to have realistic fun with anything that is left over," Cox says.

See related: Extreme, creative ways to clear debt, 4 wrong ways to pay credit card debt

Published: 9 October 2017