Small Steps Out Of Massive Debt!

GeorgianaCavendish

I mentioned the other day that I've been listening to a podcast about 'recession proofing' finances. The things they covered probably isn't news to many of the people on this forum, but it seemed to click with me in a way that it hasn't before. I think the main points that made me have another light bulb moment are : 

1. Drawing up a 'noodle budget' (i.e. a budget stripped down to the essentials) and then using this as the base for calculating what I need in an emergency fund.
2. They also said that a typical recession lasts 13 months, so working towards an emergency fund that covers between 6-12 months of the noodle budget would be sensible. 
3. Debt vs Emergency Fund is different to Debt vs Savings. If I was in an Emergency Fund situation, then I would only be looking to my minimum debt payments. I'm having a bit of a reckoning about whether aggressively paying off my debt at the expense of a fully funded emergency fund is the best thing to be doing right now. 
4. Pre-corona Financial Goals are still valid goals, they don't need to be completely neglected 
5. Talk to the right people! Speak to employer to see if they can give an undertaking about employment continuing in the short/medium term, speak to credit card providers to see if interest rates can be reduced / promo rates extended etc. 

I guess I'm realising that I need to take building an emergency fund a lot more seriously, especially given the current economic situation. It may be that I will be building an emergency fund at the expense of aggressive debt repayment strategy in the short term, but I suppose that if have money in savings then it can always be used for debt repayments and I can make that decision closer towards the time that my 0% rates expire. I feel like I've been resisting this idea for a good few months because I'm really emotionally invested in getting rid of my debt, but that might not actually be the smartest financial decision in the current circumstances. 

I suppose my next steps look like: 
1. Work out my noodle budget and get a figure of how much my emergency fund "should be" 
2. Go through my current budget again and see if there is any additional belt-tightening to do (I've been pretty good at this but always good to review)
3. Review how much I'm paying into debt and into savings, calculate how long it will take to fund my emergency fund and adjust each accordingly 
4. Contact credit card provider and see if 0% rates could be extended without incurring further charges, and do the maths on how expensive it would be if I had to balance transfer some debt to give more time for repayment while building emergency fund. It doesn't hurt to have the information! 

astrocytic_kitten

As always @GeorgianaCavendish you are a couple of steps ahead of me in your thinking and doing a great job of clarifying the vague thoughts swimming around my head 😂

At the start of the year I prioritised emergency fund savings over debt as my income was reduced and employment looked precarious due to ill health. My income is still reduced but better than it was, and I’m wavering between prioritising debt (and getting to 4 figures which I’m desperate to do) or emergency fund, or splitting it down the middle which doesn’t seem to get me anywhere fast.

Your post has reminded me of what I did during the last financial crisis when I was feeling anxious, which I should probably do now. I came up with a few scenarios on redundancy pay and how that would impact emergency fund - looked up statutory redundancy pay on the government calculator, and also found out what my employer was offering as a redundancy package and how much that would be (though in my experience redundancy packages get less generous in successive rounds of redundancies, and if your employer goes bust that’s all out the window, so it’s not something to rely on). I also calculated what benefits I’d get, and how these and redundancy pay would pad out my savings to make them last longer. It helped reassure me that even my nowhere fully funded emergency fund would last a bit longer if needed. I think there’s something like a 6k savings cap on benefits too, where the amount you get is reduced if you have more than that, so if I ever reach 6k I’ll probably prioritise anything over that to reducing debt (after a bit more research rather than my current vague memory!)

GeorgianaCavendish

Thank you @astrocytic_kitten - your post is so helpful! I will also look at the redundancy provisions that we would be entitiled to (I'm employed but DH is a contractor so it would be different for him) and the benefits calculator too - that will help with my 'worst case scenario' planning. 
I'm still doing my sums, I don't think I will change anything too dramatically for the payments due at the end of this month (I am also desperate to get the debt down to 4 figures!) but I'll reassess after that. I would really like to pay off the HSBC debt rather than balance transfer, but I'm going to reevaluate this when I've finished all my calculations. 

In other news, I have finally reached the cash out threshold on YouGov so I will have £50 arriving in the next week. Now only three years to go until the next reward! 

GeorgianaCavendish

*loud exhale* 

OK, after lots of thinking, I have decided to amend my debt repayments to take effect at the end of June and increase the amount going into my emergency fund. As @astrocytic_kitten suggested, I worked out what my statutory redundancy payment would be if I were to lose my job (I also did the contractual redundancy payment calculation which is higher, but I feel more comfortable using the statutory calculation for my emergency fund) and then calculated how much more should be in the EF to give me 6 months and 12 months of noodle budget payments. And then I had a sit down while I recovered from the shock of the shortfall 

I'm still keeping my spreadsheet up-to-date and will keep on top of when all my 0% rates end, but I really want to address the lack of savings now. Even though I would love to get the debt under £10K this month, I think that in some ways I'm using these goals as a way to delay addressing my emotional issues around saving. So I'm going to increase my 'practice' savings now .... and as I'm not locking away the money in the emergency fund it will still be available if I want to make a larger debt payment. 

A bit of a dramatic announcement there, but it's been weighing on my mind a lot so I wanted to get all my thoughts down in my diary. 

Homegrown0

That's an interesting exercise if nothing else GC, and you've got me thinking about my own situation. I believe my company's policy is to offer one month's salary for every year that you've been with the company. So for me that'd be 3 months' salary upon redundancy, which would cover 'essentials' for a good few months if we had to cut back to the bare minimum. However, if i wanted to try to find another job at my current level of seniority and salary level then it'd take so much longer to find my next role than it would've a few short years ago. I've been made redundant twice and been in a new role within 4 weeks both times, but I think it'd be a lot, lot longer now. So much to think about. 

Thanks for bringing this up - it's given me a lot of food for thought. 

Although this place is all about driving down your debt, it is also hugely about financial security and stability andthis is another way of future-proofing your finances. A sensible outlook.

GeorgianaCavendish

Hi @Homegrown0 - thanks for commenting! I'm glad my waffling has been useful Your contractual redundancy provision sounds really generous, I would love to have that! Mine is 1 week full pay for every year of service. I'm thinking along the same lines as you regarding getting another job in the current climate, I think that I have good transferrable skills so I'm confident that I could get something but whether that would be at the same level and salary as my current job is another matter so that is also motivating me to save now. 

Future-proofing my finances is the main driver behind my recent deliberations. I'm fortunate that now all my debt is on 0% so I'm not incurring more interest charges so I feel like it isn't costing me money to have those balances. Although I could continue with my aggressive repayment strategy I started thinking "if I lost my job, would I rather have £X in cash or £X of a credit line?" and immediately thought that the cash would be better!  (After all, the credit lines can always be withdrawn, especially if my personal circumstances were to change).  

I'm going to make better use of my Monzo account for savings, with different pots for emergency fund and debt repayments so that I can play around with making over payments when it feels safer to do so. I would feel much safer if I could get my EF to 6 months noodle budget, I'm currently at just under 2 months so I have a lot of work to do! 

PositiveBalance

Hi Georgina,

The nice thing about saving all your money is that you can use it to pay off your debts if you change your mind in the near future as the circumstances change.

WinterWarrior

That’s such a good idea to have a decent savings fund. Sadly I’m not quite at the stage that I’d trust myself with cash in case I spent some of it, but I can see that you are all old hands at this and much better at saving! 

Some great ideas here and a lovely thread, thank you. 

GeorgianaCavendish

PositiveBalance said:

Hi Georgina,

The nice thing about saving all your money is that you can use it to pay off your debts if you change your mind in the near future as the circumstances change.

Hi PositiveBalance - that is absolutely true, it gives me the option to pay off the debts or continue to save it  

GeorgianaCavendish

Suzanne54321B said:

That’s such a good idea to have a decent savings fund. Sadly I’m not quite at the stage that I’d trust myself with cash in case I spent some of it, but I can see that you are all old hands at this and much better at saving! 

Some great ideas here and a lovely thread, thank you. 

Hi Suzanne, thanks so much for commenting and reading my diary! It has taken me a very long time to get to this point - I used to be completely convinced that having money was dangerous because I couldn't be trusted with it so I had better get rid of it quickly (either spending it, bulk buying 'useful' things or making debt payments). I'm slowly starting to trust myself but honestly every month it is a surprise to me that I can get to the week or even day before payday and still have some cash from last payday left over ... not loads of cash btw, but better than being at £0 with 3 weeks still to go - which is where I would have been a few years ago! 

Good luck and keep the faith in yourself - you can do it!