Debt: turning a negative into a positive

Happy New Year!

Twenty twenty. Another decade behind us and it’s the time of year when everyone tries to better themselves and set those new year resolutions. As my social media became flooded with pledges and reflections from friends, two in particular caught my eye. The first was a game picking one highlight from each year to represent my decade. I chose all sorts: getting my dog, graduating University (twice), getting married and my team Fulham getting promoted to the Premier League in 2018 (never mind the immediate relegation in 2019).

The second ‘recap’ game I really enjoyed was one called “High, Low, Sleeper” – where you give your high and low point of the year, and your ‘sleeper’ – something that might not have seemed a big deal at the time, but looking back has had a fundamental impact on your life. When I looked back over my year, I decided that my ‘sleeper’ was managing my debt.

‘New year – a new chapter, new verse, or just the same old story? Ultimately we write it. The choice is ours.’ — Alex Morritt, author

Last year, when I was tidying up my finances, I decided to consolidate all my husband and my debt into one big sum to be tackled. I know this may not be the ‘in’ thing to do, but I knew I wouldn’t get any joy out of being debt free if he wasn’t as well. And, as cliche as it sounds, I knew we’d need to be a team to get through it all. So I combined all the debt from our weddings (one in the UK and one in America), my remaining debt from when I had to self-fund my Masters because I was an international student, and my husband’s debt from before we were married.

Our total debt at the start of 2019 equated to 90% of our combined annual income! Seeing that number on paper was terrifying. Luckily the Bank of Mum and Dad stepped in and covered 60% of the debt charging us 0% interest until we can finish paying them back – thanks! The other 40% was split between a 0% credit card offer and a low rate personal bank loan.

As of 1 January 2020, that pile of debt is now 35% of our combined annual income. That’s a massive chunk of money paid off – and yet I still didn’t register it as a ‘high’ moment for the year until I sat down and worked it all out. Of course, not everyone can rely on the Bank of Mum and Dad, but there were also some other methods we used that helped us significantly reduce our debt.

Trim your budget

We all knew I was going to start here. After pouring over our old budget and looking where we might cut back, I decided to start from scratch and went back to basics. For example, we sat down and figured out what we were willing to spend on food each month and it was shockingly lower than what we’d budgeted for previously. We also realised we were actually okay not going out for drinks every week, cutting back on takeouts and my bi-weekly nail appointments.

We also reviewed our ‘necessities’ to see if we could save any money: gym memberships, car insurance, electricity bills… we looked at everything and diarised dates when offers would come to an end and we might be better off switching.

And knowing that it was going to be a tough year, we made sure to budget in “us” spending – £50 a month for each of us to do whatever we wanted with – no questions asked, no guilt required. It helped to make sure we didn’t feel like we were missing out all the time.

Keeping payments the same

When I made our new budget I knew that I wanted to allocate a certain amount to paying off the debt each month and, when one payment ended, I simply made additional payments on another one. For example, when Debt A was paid off, instead of adding the £200 a month to our budget on either food, spending or savings, I added it to Debt B payment to pay it off faster. So, despite the level of debt decreasing over the year, our payments per month have stayed consistent.

What this means for investments

Throwing all this money at our debt meant that we weren’t investing much in our ISA throughout the year, but it does mean that after we make our last payment in September 2020, we’re going to have a huge portion of our income available to us that we haven’t needed or used on other things in over 18 months. Although I fully intend to enjoy a holiday and splurge a bit on Christmas 2020, we also fully intend to allocate our ‘debt’ portion of the budget to our ‘investment’ portion in 2021. And THAT is definitely going to be a ‘high’ moment.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.