Reining in Debt Effectively

The sad thing about debt management is that, more often than not, by the time you start getting interested in it and practicing it, you are most likely already in a rather problematic and difficult situation financially. Money experts will attest though that the best way to manage debts is not to have them at all, or if this is not possible, at least to have them under strict control.

All of us at some point in our life go through a period of indebtedness. This is a fact. How we deal with our situation, however, will differ from how another in a similar situation would. In other words, how we handle debt is purely subjective and may depend on our individual perceptions and beliefs.

There are experts though, both individuals and organizations, who have devoted their time and efforts to studying ways by which to best handle this pervasive human affliction known as debt. With the future of our financial stability dependent on the manner by which we deal with these debts, it would be wise for all of us to take heed of what these experts have to say.

• Have a clear picture of your financial situation. Know exactly how deep in debt you are by listing all the people and organizations you owe money to and adding up all the bills. Whether the bills are from credit cards, car and housing loans, personal loans, or whatever, add them all up to know exactly how much debt you need to eliminate.

• Review your spending habits and see where you can pull in the stops. A lot of times, you don’t even remember how you spent the money that was left over after you’ve paid for your fixed monthly bills. If you are sincere in your goal to produce additional funds to chip away at your burdensome debts, then you need to be aware of “everything” you spend money on. This includes the $3 ice cream bar you bought on your way home plus the $5 magazine you picked up at a nearby stand. These minor expenses comprise your nonessential purchases. Eliminate a few of these and you instantly generate savings to pay off some of your fixed expenses.

• Focus on paying off first those loans with oppressively high interest rates. Part of listing down all the people and organizations you owe money to is listing all your debt obligations and the interest rates you are being charged for each. Your objective here is to pay off the loan or credit card bill with the highest interest rate. You may pay the minimum required for the other low-interest bills first as you work on paying off the ones with the burdensome interest rates. Once you’ve paid these off, you can use the money you save to chip away at the debts with the next highest interest rate and so on down the line. Never miss out on any payments though. Remember , a default in payment may cause your interest rates to zoom up or even make the entire amount of your loan due and demandable.

• If credit card debts make up a large chunk of your debt obligations make sure that you start paying more than the minimum required each month. This way your payment will cover a little of the principal amount and not go solely to the payment of interest. Moreover, when you pay only the minimum required, you actually end up paying three times more than the actual value of the item you purchased because of the added interest.

Make sure also to avoid getting sucked into special deals with your credit card that assure you of freebies and rebates. In most cases, these freebies and rebates come at a higher albeit hidden price and your credit card debt will only pile up.

To reduce debt, it’s wise to maintain only one or two credit cards with the lowest interest rates which you use only in cases of emergency. Owning just two cards also helps you maximize rewards points and other benefits your card is offering. Bear in mind that your goal is to eliminate debt, not add to it. Use cash, not your credit card, whenever possible.

• Finally, SAVE, SAVE, SAVE. Nothing beats the sense of security one enjoys when one has some money set aside for any eventuality. The problem with most people though is that they generally tend to spend money first before setting aside any amount as savings. This leaves them with hardly any money left for future needs. Experts say that the most effective way to start saving is to immediately allocate at least ten percent of your income before you even start working on settling your monthly bills. While this may seem quite difficult to do at first, it will eventually teach you how to live within a budget and generate much-needed savings to pay off your debts.

Bear in mind though that not all debts are bad. Some can be classified as “necessary” or good. A good debt is often a long-term obligation incurred to finance the purchase of an asset like a house or a car. While it is generally more desirable to be debt-free, debts used to purchase an asset when handled properly can, in the long run, contribute to an improved financial situation. On the other hand, bad debts that you incur, for instance, when you charge your groceries or your holiday expenses to your credit cards will not bring you any tangible rewards but will only succeed in sinking you deeper into indebtedness. To fund these expenses you need to turn to your savings.

Remember, the sooner you deal squarely with your debts, the faster will you be able to realize that long cherished dream of financial stability. Bear in mind that, to gain the upper hand in the debt cycle, it must be you, not your debt that is running the show and taking control of your life.