Understanding your finances:1st step to controlling your debt

If you don't really understand your finances, you're bound to find it harder to get / keep them under control. It's true of anything, but it's particularly true of personal finance matters - that's one reason there are so many companies, charities and government organizations which exist to help people get to grips with their money and control their debts.

Understanding your finances: income and expenditure

1. How much do you earn?
2. How much do you spend?

These two questions are right at the heart of your personal finances. When you know exactly where your money is coming from and exactly where it's going, you'll know:

1. How much you can afford to put towards your debts every month.
2. Where you can cut back on your spending so you can put more towards your debts and get 'back in the black' faster.
3. When your situation is serious and you need to look for debt help.

So, start by writing down everything you receive in a month:

• Wages, child benefit, income support, tax credits, Jobseeker's Allowance, Incapacity Benefit, Disability Living Allowance, etc.

Add it all up to get your Total income.

Next, write down everything you need to spend in a month:

• Rent/mortgage, secured loan payments, council tax, utility bills, pension contributions, phone bills, TV licence, housekeeping, child care, the cost of essential transport, clothing and food, etc.

(Please note that this list includes payments to your priority debts but not payments to your non-priority debts (see below).)

Add it all up to get your Total expenditure.

Take your Total expenditure away from your Total income and you'll get your Disposable income. This is the money that's available for:

• Making payments to your non-priority debts.
• Spending on non-essential goods and services.
• Saving.

Understanding debt

• Priority debts

Your priority debts are the most important ones, with the most serious consequences if you don't keep up with them.

If you fall behind on your payments, you could have your possessions removed by bailiffs, or have your gas / electricity supply cut off. If the worst comes to the worst, you could be evicted - or even imprisoned! (Having said that, you should have plenty of warning if any of your creditors were thinking about taking action against you, giving you the opportunity to get some debt advice and sort out your problems before things got so far.)

• Non-priority debts

Unsecured loans. Credit cards. Store cards. Catalogue debts. Overdrafts. Some Hire Purchase agreements (for non-essential goods).

These are your non-priority debts - but that doesn't mean you don't have to repay them! It just means they're less important than your priority debts, since the consequences of non-payment aren't as serious.

So staying on top of your non-priority debts is important - but staying on top of your priority debts is vital. That's why your priority debt payments make up part of your Total expenditure. Your non-priority debt payments will have to come out of your Disposable income.

If your Disposable income isn't enough to cover your payments to your non-priority lenders, your creditors may agree to accept lower payments if you ask them - and show them that this is the best way for you to clear your debts. Just bear in mind:

1. They won't know you need help unless you tell them.
2. You need to take action as soon as possible, before your creditors decide that they need to.
3. You don't have to do it alone. Click here for help with managing debt.