Most of us borrow money from time to time – in the form of mortgages, overdrafts, credit cards, etc. Without credit, many of us would be unable to go about our daily lives.
All debt can carry some risk, regardless of how financially comfortable you are now. A sudden change in your circumstances, such as unemployment, could make your debts unaffordable.
So what can you do to lessen your risk of future debt problems?
Budgeting is undoubtedly one of the most important things you can do if you’re serious about protecting your finances. Start by writing down a list of all your regular monthly costs, and adding up the total – this makes up your total outgoings. Subtract your essential outgoings from your monthly income, and what’s left is safe to spend on non-essentials (or save).
Remember also to budget for less regular costs – things you only pay for once every three, six or twelve months, for example. Ideally, you’ll want to put aside an equal amount every month – so for three-monthly bills, put aside a third of the total each month to make sure you’re covered.
If at any stage you find your outgoings are higher than your income and you’re falling further into debt, you should consider seeking debt advice from an expert.
Even if you budget your finances well, it’s extremely useful to have a ‘second line of defence’ in case anything unexpected happens. One of the best defences you can have is a good savings account.
Experts tend to say that you should aim to have at least three months’ salary in savings at all times – but less than this is better than none at all. We all have to start somewhere, and even a few hundred pounds could potentially get you out of a sticky spot.
However, repaying debt should almost always take priority over saving, since the interest rates on debts tend to be far higher than on savings. In other words, you’ll almost certainly save money in the long run if you focus on clearing your unsecured debts first – and then start saving once those interest charges aren’t eating into your money.