Living under a mountain of crippling debt is stressful, and can delay your financial goals such as upgrading your home or even retirement. Luckily, several strategies can help you manage your debt and protect you from ending up in the same predicament again. The last thing you want to do is put off debt reduction until the only option is to declare bankruptcy. Instead, review these proven debt management strategies, and then formulate a plan that you can put into action right away.
Proactively Track Your Debts
Start managing your debt by gaining a more thorough understanding of your debt load. Create a list of all your debts, and for each, record the interest rate, minimum payment and monthly payment deadline. This overview will give you the total amount you owe and how much each debt is costing you monthly. The goal is to figure out which creditor you should pay first or most aggressively. This is usually based on the interest rate, not the total amount.
Is Debt Consolidation the Answer?
Debt consolidation refers to taking out a new loan or credit card and using it to pay off your existing debt. This only works if the new loan or credit card comes with a lower rate than your existing ones. In this scenario, multiple debts, each with a high interest rate, become one debt with a more manageable interest rate. The caveat is to avoid incurring new debt on other credit cards or applying for additional loans while undergoing debt consolidation. Doing so will negate the benefits of this method. Another bonus is that some balance transfer credit cards offer a 0% interest rate for a set period as an incentive. By taking advantage of this offer, you can pay off your consolidated debt faster.
Honestly Review and Track Your Spending
If your debt is high, there’s a good chance that you’re overspending every month. While it may require some drastic lifestyle changes, you can curb your spending to manage your debt. Time to dust off the old spreadsheet and make a list of your monthly expenses. The first step is to go through your credit card bills and bank accounts to confirm how much you’re spending on these categories:
• Housing, Food, Transportation, Insurance, Utilities, Healthcare and Medical, Personal Spending, Savings and Investments, Debt Repayment, Recreation and Entertainment, Miscellaneous Some of these categories are straightforward, but some are not. Personal spending refers to the money you spend on non-essential items outside of recreation and entertainment, such as a gym membership. Miscellaneous is for anything that’s not covered under the other categories, but is a regular expense nonetheless, including gifts. Once you have an account of your monthly spending, calculate your monthly income and then determine if you are earning more than you spend every month. On average, if your monthly expenses are higher than your monthly income, you should reduce your spending on non-essential things like entertainment and try to reduce one or more
expenses. Here are some tips for lowering your expenses:
• Walk or take public transportation more often to lower your car expenses
• Switch insurance providers to take advantage of new customer incentives or inquire if your current provider offers discounts
• Minimize the amount of money you spend at restaurants
• Try to spend less on gifts Lowering your expenses and increasing the amount you contribute to debt repayment every month can help you live debt-free faster.
Maximize Monthly Debt Repayment
Calculate the monthly minimum repayment for your debt and then go back to your budget and see how much you can increase this amount every month. You want to contribute as much above the minimum payment as possible, even if it means eating out less or delaying a vacation for a year or two. By maximizing your monthly debt repayment, you can pay more toward the principal and less toward the interest. This will go a long way toward paying off your debt faster and paying less interest in the long run.
Start Managing Your Debt Today
Don’t let your debt get you down. Even for those who owe a lot of money on several credit cards and loans, there is always a way to manage it and pay it off over time. It takes planning, commitment and sacrifice, but it is doable. Start today so that you can live debt-free sooner, and with every payment, your financial goals become more attainable.
Rob Shapiro | Contributing Writer