Christmas is traditionally the time for overspending and indulgence but with January already upon us credit card bills will soon start appearing on the doormat.

And with 2011 predicted to be a difficult year for family finances with increasing costs of living and many incomes reducing in the wake of the government cuts, now is the ideal time to review your finances and make sure that you avoid debt problems.

We explain the best way to review your current financial position and how to put in place measures to avoid and get out of debt.

Understand your current financial position

For many people, reviewing their finances can be a daunting task. But giving yourself a financial makeover does not have to be difficult.  There are some easy steps to follow:

The first thing to do is understand exactly what your financial situation is. This sounds like common sense, however I am constantly amazed at how many people go from month to month with very little idea of how much money they have coming in and the living costs they have to pay for.

If you do not do this already you should list all of your monthly income. You then need to put together a monthly living expenditure budget by listing all of your essential monthly living expenses. You should use our Living Expenditure Guide to help you with this.

By deducting your essential expenditure from your income you will be able to see how much you have left over – your disposable income – either to save or pay any unsecured debts.

Save if you have no debts to repay

List separately any unsecured debts that you have outstanding and which need to be paid.

If you have no outstanding unsecured debts you are in an enviable position. If you are not already, you should then take the opportunity to start saving so that you have money available if and when you face financial challenges down the line.

If you do not find saving easy the best way to achieve it is to plan to save. By this I mean you should first decide how much of your disposable income you want to save each month. Then arrange to save this amount at the beginning of the month.

I recommend saving your budgeted amount as soon as your money comes in as if you wait until the end of the month, all too often the money you had planned to save will already be spent.

Affordable outstanding debt – get a savings safety net

If you have sufficient disposable income every month to maintain any monthly debt repayments, the standard advice is then to try to pay off more to reduce your debts as fast as possible.

However, if you have any spare cash, unlike many other financial advisors my advice is to first save this money to build up a savings safety net.

Set a target safety net amount. This could be £500 or even £1000. This safety net can then be used if you face any financial difficulties such as an unexpected car repaid bill or your washing machine or fridge freezer breaks down without having to increase the balance on a credit card.

Once you reach your savings safety net target amount, then is the time to direct your spare cash to paying off additional amounts of your debt so that the debts are paid off more quickly.

Struggling to pay outstanding debt?

If having reviewed your income and expenditure, you find that you do not have enough money each month to maintain your required debt payments, you need to take action or risk getting into a significant debt problem.

Not having enough money to pay everything each month means that you must be maintaining your expenditures by increasing your borrowing. Perhaps your overdraft or a credit card balance is slowly increasing.

If you allow this situation to continue for too long, eventually you will get to a point where you are at the limit of your credit facilities and face not being able to make your payments.

It is best to take action before getting to this point by using a debt management solution such as a DMP (Debt Management Plan) or IVA (Individual Voluntary Arrangement) which will help reduce your debt payments to an affordable amount.