High income high debt

[chardonnayblanc]

Hi,

Has anyone else fallen into the high income - high debt trap? We have realised that our borrowing has gotten out of control. We are a couple on a good salary of £120K. For years we have been financially disorganised, using credit cards and not really worrying too much about it. Our high income has always allowed us to make the payments and we have kind of walked blindly into a high debt situation. Very embarrassing considering that we are supposed to be reasonably intelligent adults.

Has anyone else fallen into this trap, and what did you do to reverse these habits?

Money Saving Expert website has a debt free wannabe forum. Very good.
Could you post income / expenses?

Finding out exactly what you’ve spent it on would be helpful. It’s probably easier to undo the debt if it was largely one-offs like a kitchen or holiday versus general lifestyle creep and regular overspending. It might also motivate you to pay it off if you can work out how much of the debt is interest and not even your own spending.

I know people always recommend doing a forward-looking budget, but in my experience (as a business accountant), you need the data of the past first. Not for finger-pointing, but for some proper information as to what you "normally" spend. Knowledge is power!

I usually recommend people go back 3 months, get full downloads of their transactions from online banking, and analyse ALL the in's and out's for the 3 month period. That will immediately highlight how much you're spending on the different utilities, phone contracts, monthly subscriptions, supermarket shopping, cloth shopping, car costs, TV/Sky/Broadband, coffees/cakes, work lunches, takeaways, personal grooming, gym, loans, interest, etc etc. You can then make an "informed" choice as to whether each category was actually "worth it" to you. You can then make some very simple savings by cutting out the worthless crap.

You can use that data/knowledge to make your forward forecasts as to what a more realistic level of spending would look like, initially based on just cutting our the crap, but then you can refine it more by making harder changes, i.e. getting cheaper car insurance, cheaper utilities, cheaper car lease, cheaper broadband/sky/tv, cheaper phone contract/sim, etc etc.

Then you can start to see what surplus you may have, and plan how you use that surplus to best advantage, i.e. paying off the most expensive (interest) credit/loans/HP first, etc.

It all starts with the data as to where you are NOW and what's been happening for the past few months. Pointless going back further, as it's just raking over the past mistakes. It's all about changing future behaviour, understanding your finances and where the money is going, understanding how the debt is building up via high interest and charges, etc., Knowledge is power, so you need a really good handle on where you are, and then you can move forward in the right direction.

Don’t be ashamed! 120k is a good income but doesn’t afford the lifestyle you expect particularly with COL & wage stagnation. It’s akin to 80k in 2010 allowing for inflation.

The good thing is you have a low mortgage. How much can you realistically live on? I had debt after uni & I concentrated on the smaller cards first as it felt good clearing them. Rather than set a particular budget, I would have say 2 months where I lived on beans & overpaid as much as possible & the third month I would relax an pay a much smaller amount & allow myself to eat out etc. It felt like less of a hardship then being careful every month.

We had some debt spread over several credit cards and loans. I took the one with the lowest balance and paid all I could into that, the others got minimum payments, as one got paid off I focussed my attention onto others. In your case I’d start with the highest interest. I’m not sure it matters, hugely, which order you go as long as you get going.

were down to one credit card (which I’ve just put our holiday on) and a loan that is due to be paid off in the next 2 payments

I do the spreadsheet analysis of all of our outgoings and income. Started when I was threatened with losing 20% of my salary during covid.

Now I do it as a habit. It helps me keep track of all payments. It helps me to not fall into the trap of thinking we can afford something when we can't.

When I started doing it we were routinely in our overdraft well before the end of the month. Now I have a much better handle on things. We stay out of overdraft, credit card is paid off monthly, we are saving, paying AVCs on pension, overpaying on the mortgage. 5 years ago this would have seemed impossible.

The lifestyle creep trap is easy to fall into. The treats become routine so then actual treats get bigger. It's easy to see lots of money coming in and think 'we deserve this lifestyle'.

You can do this @chardonnayblanc . You haven't got bailiffs at the door so you have time to sort this yourselves.

Your mortgage is small so that’s good. Can you sell anything?

You need to sort out your budget.

Make a spreadsheet with your net income at the top.
List all your monthly basic outgoings such as mortgage, bills, food, travel to work.
Then add in a sensible budget for "some" fun stuff.
In a separate column, list all the things you pay annually, and divide to give you their monthly cost.
Total of the two columns is the monthly cost to just live.

Then see what the gap is between income and basic expenditure and work really hard to use that to pay off your debt, most expensive first.

AND STICK TO IT.

Once you are debt free, that gap money becomes savings, first a lump for a rainy day and bigger purchases like new car, and secondly for fun stuff like special holidays.

Can I recommend a book. The meaningful money handbook. It was a game changer for me. A very logical systematic way to manage your money.

One of the problems raised in this book is that if you don't have an emergency fund you can then spiral back into more debt. So he recommends putting away even a small amount to an emergency fund even while you are paying of debt. The rationale been that something will always come up that needs money, a leaking roof, a problem with the car, boiler etc and if you don't have the money to cover that you end up having to borrow more and it goes on! So with your income I would start an emergency pot now and pretend it's not there as debt avoidance. But I really recommend the book, it's changed me from being a live for the day person to planning with my money and tight budgets.

OP you are not alone and its so easily done!

I see you have found some 0% offers - this is a good first sart. Is all of your debt 0%?

Rank your debts in order of cost - from highest interest to lowest/shortest term/longest term. Then start the avalanche method.

Have you considered cash stuffing method? Have a look online. You can do it digitally with monzo or hyper jar.
It's absolutely changed the way we spend. ( have a look at The Canny Tally or Budget with Kerry on YouTube - they do some fab budget breakdown videos )

Good luck!

You aren't alone. We are similar in numbers although we live probably a lot luxuriously. Much of our debt has been IVF. I'm on my last one now because age and finances say so!

For me, what helps is knowing this is it on the spending and drawing a line under it. At least for you, you will remember nice holidays and see nice furniture. I will have injected it all into my stomach on a bit of hope for a second child. (First child was free NHS covered- but this was money I could have spent on giving him a nicer life so I do feel very, very torn about it)

I think your challenge is there is always something else, something small, a little treat. Giving up all of them is too hard and can prompt little blips of splurges.

My best advice is to psychologically see this as an end of something. You don't need to go so hard as to live like a pauper or punish yourself for the debt incurred, but you will need to draw a line in old behaviour to new. Starting now! 💪

It’s great that you’ve made such a determined decision to sort all this out OP before the debt number gets any higher, and your mortgage is enviably low :)

Highly recommend ‘Snoop’, / YNAB which tracks ALL incoming and outgoing payments plus savings and puts them into pots for all your bank accounts, savings etc. full transparency across your household if your husband will include his too. I don’t have the time or inclination to write down every spend in a spreadsheet but this does it for you and counts the spends. (Eg The horror of having x24 grocery shops in a month is motivating enough to make a change!!)

Also, you say you have a spreadsheet with all spending but have you included ALL yearly spending and divided by 12 for monthly costs. Such as all haircuts for the family, Xmas presents, back to school clothes, national trust, mot / service, dentist, birthday presents for childrens parties, swimming, birthday days out etc. Sounds like clothes are your weakness. Id still allow myself a small household allowance as a treat if you’ve saved in all other areas eg £30/50 a month for something really needed or wanted

Hi, did you manage to repay all this? Hope you don’t mind me asking…