Managing Debt

If you have debts requiring 40 percent or more of the household income, you might want to consider getting help for debt management. Certain debts, such as a mortgage, are expected. However, if you want to save more money and prepare for the future, it’s best to eliminate as much debt as you can.

Savvy debt management can help you save money.

The key to debt management is accumulating enough manageable debt to build a credit rating while not falling into money traps.

Our world has changed from a cash-based society to one where credit matters. Lenders evaluate your risk by reviewing how you borrow money and, more importantly, how you pay it back. Therefore, a little debt is expected, but it’s also anticipated that the debt will be paid off in a timely manner.

Even using a credit card isn’t bad – unless you spend more than you can afford to pay off every month.

Studies show that the average American consumer has approximately $9,000 in credit card debt. People with this type of debt are accustomed to living life through their credit cards – they buy what they want now, and pay much more for it later.

But that debt threshold doesn’t include other non-variable expenses, such as a car payment, student loans, medical bills, or mortgage. This is where most people get into trouble. They don’t have a spending plan, and the resulting stress of dealing with debt carries over into other areas of life.

Gain control of the details, and you can be successful at debt management. You work hard for what you earn, thus you deserve to have an efficient and rewarding money management plan.

Experts agree that you need to follow every coin and dollar to account for spending. Remember these tips:

• Write it all down, even the daily cups of coffee.
• Ask yourself before you buy something: do I really need this now, or can I wait?
• Activate your spending plan so you can see how you intent to spend each month, what will be saved, and what can be allotted to pay of debts.

Credit card offers are purposefully enticing. But how many cards do you really need? If you’re not willing or able to evaluate every offer, or compare the features and benefits to what you already hold, then it’s best to retain one or two primary cards.

If you find a low-interest credit card, consider transferring the balance of high-interest credit cards onto it. You’ll automatically reduce your debt ratio simply by paying less in interest and more on the balance. But review card offers carefully, as some only offer low rates for an introductory period before spiking them back up again.

Another important component of debt management is to set up a payment plan to eliminate debt. For example:

• Pay off high-interest accounts first. Again, the more you bring down the principal, the less you’ll pay in interest. If you can afford to, pay an additional $10-$100 each month.
• Once that debt is cleared, move on to the next account and follow the same system, adding a little more to the principal each month.

Experts advise against using retirement or savings to pay off debt, but it generally depends on the circumstances and your discipline to rededicate yourself to savings. Consult a financial advisor for better guidance on this option.

Financial advisors like Dave Ramsey recommend creating a savings schedule, just as you would an expense schedule. In addition to allocating an automatic deposit into a savings account, Ramsey is an advocate for putting cash in envelopes to save for spending.

Try setting aside money envelopes for particular indulgences such as eating out, vacations, and big-ticket purchases instead of using your credit cards. The anticipation of saving for the big stuff is a psychological boost, for it rewards you for being responsible and avoiding debt.

However, there are two schools of thought on saving while paying off debt. It really just depends on how big the debt is and what type. For example, if you just want to pay off your car sooner, but don't carry any credit card debt, you should still be able to add more money to the principal while setting aside some for savings. However, if you’re paying 10 percent or more in interest on a lot of credit card debt, it’s best to apply all available funds to this balance.

The website Smart Money has calculators and worksheets that allow you to determine a debt status by plugging in certain variables. The results then help you create a roadmap for solving the problem.

Hiring the services of a credit counselor may also help in your pursuit of debt management. They can evaluate your situation, structure a budget, and recommend various solutions, such as a debt consolidation loan. To find a reputable advisor near you, visit the National Foundation of Credit Counselors.

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