Maybe you have a very good job. You take home a nice paycheck every two weeks but for the past few months they just haven’t been enough. Your debts have now mounded up to the point where they are seriously impacting your life. You might even be feeling depressed about your circumstances and ready to just toss everything aside and run away to Fiji.
Better debt management to the rescue
There are a number of different reasons why people become overwhelmed with debt. One of the most common is poor spending habits. Those little pieces of plastic just make it too easy for people to buy things that they don’t really need and can’t afford. Of course, sometimes there are things beyond a person’s control such as big medical bills that can cause a sudden whirlpool of debt. But if you sit down and relax we’ll share with you some tips for better debt management that can make your life happier and less stressful.
Get a grip on your financial picture
You need to get a grip on your debts by writing them all down including the amount you owe, your monthly payments and their interest rates. Next, divide them into two columns – secured debts and unsecured debts. If you’re not quite sure of the difference between these two types, secured debts are those that are secured by an asset such as your house or automobile. Credit card debts, personal loans and medical beds are unsecured, as you were not required to pledge any sort of asset in order to get the money.
First things first
The first thing you need to do before creating a debt management plan is to track your spending for about a month. Next, organize it into general categories such as food, clothing, utilities, insurance, entertainment, dining out, and debt payments.
The B word
The third step in better debt management is to create a spending plan or budget. Now that you know how you’ve been spending your money you can determine where you could make cuts. Most people find the easiest categories are dining out, entertainment, food and clothing. The goal here is to reduce your spending to something less than your monthly earnings. Ideally this should be at least 20% less.
Create a plan for dealing with your bills
Let’s talk unsecured debts first. One good debt management plan for dealing with them is what’s called the snowball strategy. The financial guru Dave Ramsey developed it. To use it all you need to do is take the list you’ve made of your unsecured debts and organize it with the one that has the lowest balance first down to the one with the highest balance.
Use the money you’ve saved by reducing your spending and focus on paying off that loan with the lowest balance while continuing to make the minimum payments on your other debts. Once you’ve paid off that first debt you will have “new” money available to begin paying off the second debt and so on. Most people who use this tactic find they can pay off most if not all of their debts in just two to three years.
Those pesky secured debts
You’ll also need to make a plan for dealing with your secured debts. If one of them is a mortgage you may need to contact your mortgage holder to see if you could negotiate a better interest rate or even a refi. Auto loans are more difficult because lenders have very little incentive to negotiate with you.
Professional debt management
All of this can feel very overwhelming. If so, you might need professional help from a non-profit credit-counseling agency. When you go to one of these agencies you will be assigned a trained and experienced credit counselor that will review your spending and suggest improvements or those areas where you could make additional cuts. Your counselor will help you develop budget to improve your cash flow so you’ll have more money available to pay down your debts each month. He or she may also suggest a debt management plan or DMP. This is where your counselor contacts all of your creditors to see if they would be willing to lower your interest rates and reduce or waive any fees you owe. She or he will also help determine how much you can afford to pay your unsecured creditors each month and then work with your creditors to see if they will accept these amounts.
The primary advantage of a debt management plan is that it consolidates all of your debts into just one payment and will get all your creditors off your back. Equally important that one payment will probably be less than the sum of the payments you are currently making.
However, there are some downsides to a professional debt management plan. For one thing, you will be required to give up all of your credit cards and not take on any new debt until you’ve completed your plan. Plus, the arrangements made by your credit counselor are informal and your lenders could change their minds at any time. In addition interest will probably continue to be charged on your debts particularly those that are in arrears and may be charged at higher rates than those of your original loans.
Follow the tips that you read in this article and you will soon be on your way to better debt management and a happier, less stressful life.