As you learn to manage your debt, be sure to read our previous blog post on this subject, Money manager tip: Debts
Debt is commonly defined as “something, typically money, that is owed or due.” It can be overwhelming if you find yourself in a position where you owe money that you cannot pay. If you find yourself in this situation, don’t give up, and don’t ignore the problem. There are strategies and resources to help you manage your debt effectively. Even if you only have a little bit of debt, it is important to learn how to manage it. Here are some tips to consider during this process:
Organize your debts.
Organizing your debts can make it easier for you to create an effective debt-management plan. You can do this by making a list of your debts, including the creditor, monthly payment, total debt amount and the due date. You can use your credit report and statements to confirm the information on your list. This list can help you stay more organized and punctual with your bills and payments. It can also help you calculate your debt-to-income (DTI) ratio. Knowing exactly who you owe, and how much you owe them, can be an important first step in managing your debt.
Prioritize your types of debt.
You may be asking yourself which debts you should pay off first. Money borrowed to pay for a home or for a college education is often considered “good debt.” This is because these items can help boost your financial situation over time, and are considered investments that can grow in value or generate long-term income. Some home and student loan debt may even be tax-deductible. For these types of loans (mortgage and education), strive to continue making regular installment payments. These installment payments are designed to help you pay off these debts in a structured way over time. Failure to make payments on a home mortgage may ultimately lead to a foreclosure on your home. Consult a professional for tax advice and keep in mind that even “good debt” comes with risks.
Other kinds of debt, like credit card debt, can be problematic. This is because payment amounts vary and credit cards can have a high interest rate. Paying off your highest-rate debt first may give you the biggest boost. For example, putting money toward a credit card bill with an 18% interest rate first may save you more than putting that money toward another debt with a 5% interest rate.
Create a new budget.
Once you’ve organized and prioritized your debts, it may be helpful to create a new budget with the goal of paying down your debts in mind. Carefully consider your wants vs your needs. You may need to cut back spending in your “wants” category to begin making progress on your debts. Because most debts must be serviced each month, a new budget can help because it can track where each dollar is going every month. It can help make sure any “extra” money you have left over each month goes towards paying off your debts faster. Be sure to check out our previous article on budgeting.
Avoid new debt.
Avoid taking on additional debt when you’re already feeling overwhelmed with what you’re dealing with. Staying within your budget, avoiding impulse purchases and paying with cash whenever possible can help you stay on track during this process. Another way to avoid taking on new debt is keeping close tabs on bank balances to avoid bank overdraft charges.
Consider additional resources
If you find that managing your debt by yourself is too difficult, additional help may be available. You can look into working with a professional who can help you develop and execute your debt-management plan and look into other options surrounding your debt management.
Managing debt can be a challenging process. Remember that it usually takes dedication, patience and self-control over a period of time, but being debt free is possible.