Manage Your Debt – The Basics

Debt is a problem that people of all backgrounds and income levels experience. Whether it’s a small sum or a very large amount, debt can feel like it’s taking over your life and holding you back in many ways. Fortunately, there are several savvy and effective debt management strategies that can give you the tools you need in order to eliminate your debt for good. Take a look at these methods that can set you on the right path toward being debt free:

Understanding Debt

Before you dive into managing debt, it’s important to know that there are two distinct types of debt: good debt and bad debt. Good debt includes any money that you owe for an investment that is generally expected to benefit you in the long run. The most common types of good debt include money you owe for mortgages, student loans or business loans.

On the other hand, bad debt usually refers to money owed for disposable purchases that probably won’t create more wealth in the long term. Most people incur this type of debt when they purchase goods on their credit cards and neglect to pay the balances. Bad debt is the type of debt you should primarily be concerned about when you’re examining your finances and creating a debt management plan.

Determining the Exact Figure

Many people have trouble addressing their debt because they aren’t sure how much debt they actually have. The best way to start managing debt is by determining exactly how much money you owe to each creditor and making note of the interest rate for each amount.

Keep these figures in a file that you can easily access and update. Being able to see the concrete numbers—and watching them change month to month—will not only keep you aware of the current state of your debt, but it will also inspire you to stay on track and continue making progress.

Creating a Budget

Even though many people shy away from the idea of creating a budget, the truth is that budgeting is an essential money management skill that can actually free you up to spend money on the items that are most important to you. Budgeting is also an important tool because it will help you get out of debt and give you a much better chance of staying debt-free for the long haul.
To make a budget, start out by calculating your total monthly earnings and essential costs.

Costs usually include food, rent or mortgage expenses, car-related payments, utility bills, credit card payments and any insurance costs. Finally, a list of ‘extra expenses’ which are those not considered essential. These would include entertainment, travel for pleasure, etc.

Decide which extra expenses need to be reduced or cut in order to make your monthly earnings exceed your monthly costs. Eliminating unnecessary costs—such as large cable packages and restaurant expenses—is a great way to make sure you are spending less than you earn. However, you can also take measures to drastically reduce your essential costs by moving into a cheaper apartment or sharing your living costs with a roommate.

Pay On time

Many people who struggle with debt also have a hard time paying their bills on time. However, making on-time payments is a crucial part of managing debt. Falling behind on your bills often means you’ll have to pay more over the long term because you’ll be charged for interest as well as the original cost of the bill. In addition, if your bills are extremely late, you’ll have a much harder time paying that larger sum after you’ve racked up several months of overdue bills. Get in the habit of regularly paying all your bills in their entirety when they are due.

Making the Switch to Cash

Credit cards are some of the biggest culprits behind the debt problems of so many individuals and families. While it’s certainly tempting to swipe your credit card and worry about paying for that purchase at a later date, this is a financially reckless way to operate.

Overusing a credit card can make you feel like you have more money than the amount that is actually in your bank account. If you’ve racked up credit card charges that you can’t pay off each month, it’s a good idea to stop using credit cards altogether. You will still need to pay down the balances on your cards, but make a pledge to stop putting new charges on your cards.
Cancel any automatic payments that go through your credit card and use cash for those items instead. Leave your credit cards at home when you go out, this way you won’t have the option to pull them out when you’re shopping. When you receive mail that includes credit card offers – dispose of these immediately to avoid the temptation of opening up new lines of credit.

Debt Free

If you’ve been struggling with owing money for many years, finally managing debt may seem like an overwhelming feat. Fortunately, if you make an honest assessment of your situation, create a sound budget and avoid incurring more debt, it’s certainly possible to eliminate even the largest amounts of debt. Keep track of your progress in order to stay focused, informed and inspired to continue working toward debt elimination. It may require some sacrifices along the way, but you’ll find that leading a debt-free life will be well worth your efforts.

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