Are you determined to get out of debt this year? There are more tools at your disposal than you think, particularly in the smartphone era.
We’ve spoken before about how apps can help you as part of a saving strategy, but you can also use them to help clear your debt too.
Most money-related apps use artificial intelligence (AI) software to smartly analyse your financial activity, with the insight being utilised to suggest better ways for you to save and spend. This makes them almost like an automated form of a financial advisor*, and they come with other benefits such as notifications when money comes in and out and suggesting alternative providers when you are overspending on your bills.
There are three types of apps that can be used to start eliminating your debt. These focus on saving, budgeting or straight-up banking. All the apps we mention are free unless otherwise clearly stated.
*Note: Whilst AI and apps are useful for providing financial insight, any key financial decisions should still be made via expert financial advice. If you are in debt or financial difficulty you can receive free advice from a debt charity such as Stepchange or Citizen’s Advice.
Which debts should I pay off first?
In order to pay off your debt, you will need to meet all minimum required payments each month (like your priority household bills) and try to find extra cash on top. Which debts you focus on paying off first depends on which debt payment strategy you choose to follow, the ‘avalanche’ or the’ snowball’ method.
The ‘avalanche’ plan focuses on paying off the highest interest debts first, which in theory should be the cheapest way as you will pay lose the most expensive debts quicker. The ‘snowball’ plan focuses on paying the smallest debt first, with the idea that as you clear a debt you will be more motivated to continue to do so, which could save you more in the long run.
Which you choose is down to you, because there are pros and cons to each. Even though the ‘avalanche’ method might focus on the higher interest accounts you may be less motivated to commit to it, which will mean it takes longer to get out of debt in the long run (and potentially cost more).
If you’d like to consistently build up your savings in order to pay off your debt at regular intervals, using a savings app such as Plum or Chip, is a good way to do this. They offer seamless savings options including the chance to round-up your payments to the closest pound and save the difference - eg you spend £2.19 on a coffee they will put 81p away from you. This soon adds up.
We would then recommend using the money saved this way to pay off debt on a weekly basis. Bear in mind, if you have an overdraft you might as well keep the money in your bank account all along to keep chipping away at it unless you plan to pay off other debts with it.
Savings apps do come with other advantages, using AI to analyse your account and advise on things like the best savings strategies and ways you can save money on bills.
Alternatively, if you decide to keep your savings to the side and not use it to pay off debt, it will more than likely cost you money, as the interest charged on borrowing is likely to be much higher than the interest earned on savings. For that reason, it might not be the smartest of choices but there are exceptions, one example being if you need to keep money back for emergency situations.
Money tracking and budgeting
You can also use specific budgeting apps to develop greater control over your money in general. Again, the idea is once you get your finances in shape, it should be easier to see if you’ve got anything spare to put towards your debts.
Using AI, these apps allow you functions like setting up specific budgets for certain types of spending (bills, food, clothes, etc), as well as overseeing all of your different accounts in one dashboard.
Apps include the likes of Money Dashboard, which will help you better manage your finances overall, giving you an idea of what you are overspending on. Squirrel (you can get it for £3.99 per month with a 3-month free trial on Finder or £9.99 per month as standard) will set aside money to meet all your bills before transferring it back in the day they are due, avoiding you spending the money beforehand, whereas Emma is excellent for sticking to specific budgets for categories of spending.
The main purpose of these apps is to restrict your unnecessary spending as much as possible and to set money aside in the savings tabs. You can then use that to pay off your debts.
Up until recently, banking was pretty straightforward, with the vast majority of options coming from your high street bank. That’s since changed with a number of start-ups that offer digital-only banking, who have dramatically shifted the way we see our money.
Banks like N26, Monzo and Starling all offer apps with many of the features explained above, but as part of your current account package. They also come with additional extras such as being able to use your card abroad for free (all three), being able to multiply your round up totals (Starling) and detailed spending breakdowns (N26).
High street banks have started delivering some of these features, but, as of yet, they don’t offer quite the same level of insight. Of course, they do still possess human interaction via their branches and phone services which may be more important to you. If you are thinking about switching over, this explains some of the considerations you should look at.
Disclaimer: All information and links are correct at the time of publishing.