Take a deep breath. And then look at your bank statements and credit-card bills. And while you are feeling brave, go through those store-card statements and mobile-phone bills - surely they won't be as bad as you think. But if you have no idea what they will contain, it is time to get real with your finances.
Everyone pushes the boundaries of their bank account at some point, but you need to be honest with yourself. If your bad money habits are becoming more of a lifestyle, then breaking the cycle of spending everything you earn will avoid long-term problems.
You are not alone
Sex And The City's Carrie had exactly this problem. Surely another pair of gorgeous shoes would not make that much difference? But, over time, the spending mounts up and when you do take stock, you realise you have nothing to your name but debts and great footwear.
Nearly one in four people admits to regularly using loans or credit cards to pay their household bills and meet other day-to-day expenses, according to a new survey by accountants KPMG. The increasing must-have culture means the pressure is on for us to have everything now. But it is leading people into mounting debt, with many owing around £10,000. Many of those who took part in the survey said they were even using credit cards for everyday items and weekly food bills, and 15% of people said their debts were spiralling out of control.
Crucially, nearly half those questioned preferred to bury their heads in the sand over their debts, with 45% admitting that they failed to read their bank and credit-card statements regularly. This is where the problems really start, but it is never too late to face up to your finances.
Danger signs
Do you...
Have more than two cards and constantly rising balances?
Pay just the monthly minimum for each card?
Have long-standing store-card debt (at 30% interest)?
Borrow from one source to pay off another debt?
Have trouble paying for essentials - mortgage, bills, food?
Find that you run out money long before pay day every month?
Regularly pay for food with credit cards?
Face legal action by lenders?
Dread the arrival of the post and put off opening bills?
Row with a partner over debts?
If some or all of this sounds horribly familiar, it is not too late to make changes.
Money workout
OK, after all that carefree spending, it won't be fun to stick to a budget, but it will get you out of the financial danger zone and ultimately give you more choices rather than less.
Step 1: Put together a budget
Keep it simple, with one column to list your incoming funds and the other to detail your outgoing costs. Include everything from your mortgage and bills through to your travel, lunch and toiletry expenses. Try to spot areas where you can cut back and do without non-essential items. It may mean that you have to cut back your social life for a while - be prepared to make sacrifices. Heading off to the wine bar at weekends instead of weekdays and cutting out the daily cappuccinos will all help. But you don't have to be miserable. Taking your own sandwiches to work is not the end of the world. If your bank has as an online system, then managing your finances through that will allow you to keep a day-to-day check on spending.
Step 2: Prioritise your bills
Make sure that your mortgage or rent and other essential household bills such as electricity, council tax and gas come top of the list. Then put credit-card bills, loans and any other debts in order, with the highest interest payments first. It may well be cheaper to roll your debts into one personal loan. Your budget will reveal how much spare income you have and give you a clear idea of how much you could afford to repay each month. Don't be tempted to over-borrow, though, or you will make the situation worse. The other thing you need to be strong-willed about is cutting up any credit cards that may tempt you to keep spending beyond your means.
Step 3: Assess your situation
If it is clear from your budget that you will be late making payments, that you do not have enough spare cash to start reducing your debt, or that you cannot even keep up minimum payments, consider asking lenders to reduce payments or freeze interest. Contact the creditor in writing or by telephone, explain the situation and let them know what you can pay - even the smallest payment will show that you are making an effort. If it has not already done so, the bank or card company may freeze your account until you have caught up with payments. Make sure you keep copies of letters and notes of telephone conversations.
Some banks and building societies take people more seriously if they come through a Citizens Advice Bureau (CAB), as it shows you are serious about your finances. If you do negotiate lowered repayments, be aware that this could have an effect on your credit record.
Step 4: Set yourself a target for getting the debt paid off
When you're debt free, make a new budget and stick to it. Get used to using debit cards, which take the money straight out of your account. That way, you will know just how much you can spend, and you won't be afraid to open your bank statements again.
