Author: Alan Chamberlin

How to prioritise your debts

If you have more than one debt, it’s common to feel a little overwhelmed. This guide is intended to help you learn how to work out which debts need to be paid off first so that you can clear them more quickly and save yourself some money in the process. But why is it important to pay off your debts in the right order?

Simply put, there can be serious consequences to not paying off certain debts before others. If you feel like you’re always playing catch-up trying to make repayments on time, it’s helpful to split your debts into different categories:

  • Priority
  • Non-priority
  • Urgent action required
  • Debts that require urgent action

Sometimes, debt can cause you to face an abrupt emergency, such as:

  • Court action
  • Disconnection
  • Eviction
  • Bailiffs

If you find yourself in one of these situations, it’s important to seek free, independent advice as soon as possible. A reputable debt adviser will be able to act on your behalf to speak to the courts, your creditor or a bailiff. They will also give you quality, actionable advice on what you should do next. If you have a court hearing, you should always attend. That is your opportunity to come to a new agreement.

If you fail to attend, a decision may be made in your absence, and you won’t have a chance to give any input regarding your circumstances. By turning up, you can tell the court about your situation to help them come to a decision that is more fitting for you. Advice organisations like Citizens Advice and Shelter can be provided by the courts to give last-minute advice. If you have less than 24 hours before your court hearing, ask if you can be provided with someone to speak to before your case begins.

What is a priority debt?

The debts that you should give priority to are the ones that have the most severe consequences for not paying. It doesn’t necessarily have to be the largest debts, or those with the highest interest rates. Instead, prioritise those that could cause serious problems if you don’t pay.

You should prioritise:

  • Court fines
  • Television licence
  • Council tax
  • Child maintenance
  • Energy bills
  • Mortgage/rent/loans secured against your home
  • Income tax/national insurance/VAT
  • Hire purchase agreements for essential items

Priority debts need to be paid off first because failure to do so could land you in serious trouble. Perhaps you would get summoned to court or visited by bailiffs. You might have to declare yourself bankrupt, or you may have your electricity or gas cut off. In some circumstances, you could even lose your home.

So what is a non-priority debt?

Non-priority debts are the ones where the consequences for non-payment are less serious. By failing to pay non-priority debts, creditors could eventually go to the courts are send out the bailiffs, but the threat of that is not imminent. Non-priority debts include things like:

You should also treat debts relating to water and sewerage bills as non-priority, but they are essential household expenses. They are an ongoing service that must be paid for, and if you don’t pay them then the amount you owe will continue to rise.

Paying off non-priority debts faster

You should aim to make at least the minimum payment on every debt so that you don’t fall behind. If you have the budget to pay more than the minimum, spread out that surplus cash in the following way to get through your debts more quickly:

  • Prioritise the most expensive debt first.
  • Target the debt that has the largest interest rate.
  • Ensure there are no additional charges for overpaying.
  • Pay as much as you possibly can, ensuring you don’t breach the terms of any other credit agreements you have.
  • Once the most expensive debt is cleared, move on and follow the same process for the next most expensive one.

Finding free debt advice

There’s no need to drown in your debts, especially when a debt emergency like an eviction or court summons comes up. If you feel like you don’t know where to start, or you need support, you’re not alone. A large portion of people in debt feel uncertain about the best way to clear their debts, and this is the time when a debt adviser can be a big help.

Seeking debt advice can really help ease the stress and help you feel more in control of your life. If you procrastinate on getting advice, your problems are likely to get worse. You may find:

  • You’ll be unable to get loans anywhere else
  • Your cards become maxed out
  • It takes much longer to pay off what you owe
  • The problems snowball and get out of control

Advisers can be contacted in a way that works for you, meaning meeting in person, over the phone or online. Seek help today and take the first step on the journey to being debt-free.

When can you afford to retire?

There’s a lot to consider when thinking about when you can afford to retire. You need to look at how much money you have saved, and what income you’ll be able to get when you’re no longer working, as well as how much you’ll actually need to live on comfortably.

How long will retirement last?

It’s impossible to predict exactly how long your retirement will last, but you need to make sure you budget for long enough so that you don’t run out of money in your later years. Retirement can last over thirty years, depending on when you retire and how long you then live, so you need to make sure you plan to cover yourself financially if you do live that long.

How will your budget change during retirement?

When you retire, your budget will change. Suddenly, you won’t have your normal salary coming into your bank account, so you need to weigh up the difference between what that would have been against your new pension income streams.

You also need to think about how much money you’re going to need in retirement. Any work-related costs will probably end, but your household bills may go up as you spend more time on yourself and your home. Plus, there’s the chance you may need care later in life, which you may want to set aside money for.

State Pension

Anyone who has made at least 10 qualifying years of National Insurance contributions (whether you’ve paid it yourself, or you were getting credits) is entitled to the State Pension. The new State Pension applies to any man born on or after 6 April 1951 and any woman born on or after 6 April 1953.

The age you can claim the State Pension from is changing, rising up to 68 years old eventually and potentially further as it is reviewed. Your start date will depend on your date of birth and gender, but you can check your personal details on the government’s website.

The full new State Pension is £175.20 per week, although to be entitled to that you’ve made 35 years of National Insurance contributions. You can boost it by 1% for every 9 weeks that you defer your start, which works out at around £10 extra a week if you defer by a year.

Other pensions

You may be entitled to a salary-related pension from your employer, which is defined by the career salary you’ve earned. This is a regular income that you’re likely to be entitled to from 65 years old, but you can defer it if you want to increase the income.

Most people will instead have a workplace pension pot, that’s been built up over a number of years. Since workplace pensions became mandatory, you’ll have been putting aside some of your salary before tax that you can then access when you turn 55.

Of course, if you don’t intend to retire at 55, you’ll be leaving yourself less money to generate an income. One of the more common ways to generate an income with your pension is to buy a lifetime annuity, which gives you a guaranteed income for the rest of your life.

You’ll essentially trade in the lump sum you’ve built up for a regular payment into your bank account every week or month until you pass away. You can choose how much of your pension pot to use on this annuity – if you want to take a lump sum first to clear debts or buy a holiday, you can. But the higher the pot, the better an annuity you’ll get.

Other income

You may decide that your pension income alone won’t be enough to support the lifestyle you wish to enjoy in retirement. That’s when it’s time to consider alternative ways of generating income.

Retirement doesn’t mean that you can’t work, and so you may wish to continue working part-time either in a related field or something more casual where you don’t feel as much stress. By adding a few hours a week, you can generously top up your money to help you get by.

If you have any savings or investments that you don’t plan on giving to loved ones when you pass away, now is the time to start looking at how you can use this to either generate regular income or take a lump sum and spread the cash over your retirement.

If you own any property, you may wish to rent it out to create a regular amount of money coming into your bank, or you could sell it instead and bank a larger sum that you can dip into when needed. And if you have a large enough home that you’re living in, you could consider either a lodger, or selling some of the equity, although seek financial advice before you to in order to help you get the best deal.