If you are reading this article, chances are that you are neck deep in debt or perhaps making good salary but still living paycheck to paycheck, being unable to save any money. Debt can seriously impact your life and destroy the power of your paycheck. It is the single largest obstacle between you and your life’s dreams. In this brief guide, we will consider some ways to manage debt wisely.
Table of Contents
- 1. Set and work methodically towards your financial goals
- 2. Build a safety net
- 3. Make a monthly budget
- 4. Be responsible
- 5. Avoid paying minimum due on credit card bill each month
- 6. Know the warning signs that your debt risk is very high
- 7. DIY solutions to managing debt
- 8. Seek credit counseling
- 9. Check your eligibility for DMP
- 10. Consolidate all your debts
1. Set and work methodically towards your financial goals
Goal setting is an essential part of debt consolidation. It involves setting small, time bound goals and working methodically to achieve them. You can set many small goals at a time or try to pay off one of your largest debts, such as your home. This way, you can focus your efforts and slowly and steadily manage debt wisely.
2. Build a safety net
As you create your managing debt spreadsheet, you might even find that you have a bit of money to save. This should be one of the first goals to manage overwhelming debt. Having a savings account means you get to pay in cash for emergencies like home repairs or car maintenance. Saving account funds can also help you tide over unexpected difficulties like loss of a job, death or divorce etc. Experts use the ‘manage debt calculator’ and recommend stashing away at least 10% of your take home pay every month.
3. Make a monthly budget
A monthly financial budget is the most important tool to get out of debt. Unfortunately, when it comes to budget planning, many people erroneously think that it tends to create restrictions. In reality, a monthly budget can actually give you freedom. Even if your past budgeting attempts have failed, you may still want to use a ‘managing debt spreadsheet’ and re-start all over. Calculate your expenses and note areas where you can save. These days, there are many tools available online. Use the tool from Quicken which takes major expenses into account and comes up with a plan that can help you save every month.
4. Be responsible
Often times, people start getting sloppy with their finances as time goes by and they get better at saving a bit each month. Never let that happen to you. Pay your bills on time, avoid backsliding, and always pay in cash rather than credit. Do not treat your home equity like it is a piggy bank and never run your credit card balances.
5. Avoid paying minimum due on credit card bill each month
Many people simply make minimum payments on original debt. This is not an effective way to deal with debt. Let us illustrate this with an example: Suppose you have a debt of $15,000 with an interest rate of 16.99%. You could actually end up paying $13,000 in interest alone over the next 21 years and 6 months needed to pay it off. In short: paying just the minimum of your credit dues puts you at tremendous financial risk and continues to pile on your debt.
6. Know the warning signs that your debt risk is very high
Here are signs you are at the highest debt risk:
- You are unable to make daily purchases without swiping your credit card
- Even minimum payments are impossible for you to pay off
- Your interest rates are piling up and you have reached the max limits on all cards
- You are getting letters and phone calls from collectors to whom you owe
- All these problems are creating health problems like insomnia, anxiety, headaches and so on.
7. DIY solutions to managing debt
Here are some common ways people use to get out of debt:
- Negotiate with creditors-You can talk to your creditors to lower monthly interest rates, come up with new terms or simply reduce the total amount you owe. This is a good option to manage debt for someone who has the time and necessary skills to deal with multiple creditors.
- Cash in on investments like 401 K, stocks and bonds, real estate or retirement assets. This is only a good option to get out of overwhelming debt if you have good retirement assets and also ways to build it up quickly.
- Use the house you own to get out of debt- You could use cash out refinance or a home equity line of credit. This is a good solution to manage debt for someone who has equity in home and qualifies for lower interest rates.
- Use credit card debt strategies– This is only an option for people who have cash to spare at the end of month. There are different strategies such as getting rid of debt with the higher interest first and reducing the total number of debts you have. Note that this is an option only for someone who can pay more than monthly minimum on their balances.
These might not always be the right options for everyone. Hence sometimes, it is best to consult an expert. The more you educate yourself on different debt management strategies, the better will be your position in using them to get and stay out of debt.
8. Seek credit counseling
A credit counselor is a professional who can help you get out of overwhelming debt. They review your financial situation thoroughly and help come up with a plan to solve the issue. There are many non profit credit counseling agencies that can give advice on important matters like getting out of student loans, bankruptcy counseling/advice, monthly budgeting etc.
9. Check your eligibility for DMP
DMP stands for Debt Management Plan. In most cases, a person is eligible for DMP if his credit card and consumer debt is 15-49% of annual income. You will need to show you qualify for the DMP and lower interest rates by proving you have adequate income to make payments each month. Only if you can manage and afford to pay additional upfront fees, will a DMP be a good solution for you.
10. Consolidate all your debts
Only someone who has good credit score and good spending habits can opt for debt consolidation. Debt consolidation could be done by taking out a loan or using a balance transfer card. This option works best if you have good credit and can afford monthly payments. Otherwise, it could end up increasing your total amount you owe rather than decreasing it.
If none of these methods to manage debt and save work, you might have to file for bankruptcy. This is the last resort for someone with poor credit score, few assets and more debt than they can ever pay back. Each of these ‘managing debt tips’ has its pros and cons. So do make sure you understand all your options and choose wisely.