Many individuals of varying economic and professional backgrounds have little or poor Debt Management skills and now find themselves trapped in a downward financial spiral – forced, mostly through corporate downsizing or unemployment, to live on credit by borrowing more and more money from their bank, by utilizing one or several credit cards up to their credit limit, or by using other refinancing alternatives such as consolidation loans, pay day loans, home equity loans or a home equity line of credit.
Many of us have become slaves to our credit. We spend money, we use our credit cards and we buy cars and homes. The children need some more clothes for school or that family vacation we have not taken in years. So we buy on credit. But it is how we perform at our debt management that can allow us to achieve “financial freedom.”
At the time when we spend money on these purchases, the costs seem to be minimal or unimportant, as we think that we can pay for these expenditures with the next month’s pay check. But the next month rolls by, something else crops up – the expected pay rise or stock market killing did not materialize or unemployment raised its ugly head – and the debt has not been paid off.
As a result interest usually begins to accrue and as more and more interest accumulates, the more the original purchases actually cost and the outstanding debt spirals out of control. Consequently we are forced to lower our current standards of living by having to choose between repaying the ever-increasing debts and spending on health, education and other more important essentials.
Many now see the personal debt management problem as one of the most important political and moral issues of our time.
One of the reasons debt is so dangerous is because there is usually no debt management education curriculum dealing with debt management until you get to the university level. By this time, many adults are already in debt, because of student loans or credit cards they received in their freshman year. Some if not many, young people believe they will make enough money when they leave college to pay off these debts, but this is not a certainty.
Debt can prevent you from dealing properly with your financial planning. When money must be set aside for paying off debts, less money is available for retirement, and maybe others forms of protection including disability and long-term care. You may have to work a number of extra years beyond your expectation because of your debts. Your debts can become disastrous to your credit if it results in your being late on your mortgage payments, or worse, you default on a loan.
Debt is often seen as an enemy in the financial planning process. But with wise and sensible debt management, your financial outlook can improve. Planning is usually the culprit, when it comes to getting burdened by debt.
Planning is very important. If you know you are buying a home in two years, it is a good time to start planning by eliminating bad debts. The more control you have over your debts, the more financially rewarding things you can contribute to including your children’s education or the new business project. It is never too late to start, it is up to you to begin.
Debt can stop you reaching your financial goals. However getting a strong hold on your debts can be the difference between “financial freedom” and being burdened by debt. You should make debt management part of your financial planning and seek help if necessary.
There are simple, common sense debt management steps you can take to get out of debt. Unfortunately, like losing weight, they are not necessarily easy or painless – but if you stick to them, you will become debt-free.
Stop Borrowing Money – The first step to escaping debt is to stop borrowing. Simply put, the more you borrow, the more you will owe. You can’t borrow your way out of debt, but must instead pay off your existing debts while not borrowing additional funds.
If you are a typical consumer, you probably engage in a lot of borrowing by making purchases with credit cards. You should try to break this credit habit. Most credit card companies and store cards will reduce your credit limit if you ask them to do so. The credit card company may try to talk you out of lowering your credit limit – because they make the most money when they let you borrow more than you can afford. You can also cut up some or all of your credit and store cards.
Budget Your Income and Expenses – Map out your income, expenses, and payments on your existing debts for a typical month, and create a balanced household budget. Remember to budget some money for emergencies – if you are fortunate enough that no emergency occurs, you can either save the money for future emergencies or, if you are afraid that you will spend it, use it to pay off some of your debts.
If you are paying credit card debts, budget to pay more than the minimum required monthly payment. Minimum payments are usually set in an amount such that, if you don’t make an additional payment toward the credit card balance, you will never pay off the debt. Usually, your credit cards will carry the highest interest of any of your debt, and thus it will make sense to pay them off first.
If you cannot figure out how you can possibly pay your bills and still have enough money to survive at the end of the month, you may wish to consider using a credit counselor or a debt management service. You may also wish to consider the possibility of a debt consolidation loan.
Stick To The Budget – For many people, this is the hardest part of debt management. It is easy to create a theoretical budget which allows them to get their debts under control, but impossible to resist the impulse purchases which break the bank each month. You can help avoid temptation by cutting up your credit cards and instead making your purchases with cash.