Debt Management Tips

Focus on the facts. That’s the first step to handling debt and most of the problems you may encounter in life.  When it comes to handling debt, it means determining exactly what you owe, how much the monthly payments are, and what the interest charges are. No more hiding from those bills in the mailbox!

Many people are struggling with debt these days.  It’s not surprising during these tough economic times that because of the stress these financial issues put on people, some tend to hide by blocking them out and avoiding them.  Unfortunately, that’s NOT the best way to handle debt. It’s important to know what you’re paying in interest each month.

The first step towards good financial health is a good diagnosis.  Let’s say your monthly interest payment is $200 per month and you have a monthly net income is $4,000. That means you are paying 5% of your income PER MONTH  to interest.  If it’s a credit card payment, then you are paying 5% of your monthly income per month to have the items you have pruchased sooner than if you were to save for them - is that worth 5% of your income?

If you come to a point where that $200 per month (for some, it’s much more than that) is the total amount that you are able to pay each month without suffering financial hardship, you have reached a point that basically means you are unable to pay off your debt.  Think about that.  If all the money you are paying is going to interest, then none of it is paying down the principle amount that was charged or borrowed.  It is very important to review your bills and consider how much of your monthly payment is going to interest and how much is going to principle.

When you review your statements, you may find that 90% of your monthly payment goes to interest and only 10% goes to the principle.  This is the case for the first few years for most American’s with an average home loan.

Let’s say, for example, that you owe $10,000 at 7% interest.  You may be required to only pay $116 per month, but do you realize that it will take you 10 years to pay off that debt?  The interest will end up costing you $3,933 - almost 40% of the total amount.

Now that you’ve taken a good honest look at your situation, you need to take a couple of steps further.  First, create a budget that will enable you to make payments as large as you can handle so that you can get your bills paid off.  I always recommend finding which credit card or loan has the highest interest rate and paying off the bills in order or highest to lowest interest rates, not necessarily the largest balance.  This method will help you begin saving money right away.

Some people prefer what’s referred to as the “snowball method” which is when you pay off the smallest balance first and then continue to pay them off in order of smallest to lowest.  This is helpful if you want to being reducing the NUMBER of monthly payments that you have quicker. Some people prefer to pay off the largest bill first, but that method is generally hard to stick to, its very slow progressing, and it’s easy to get discouraged and give up. You’ve got to take an honest look at your situation and decide which method is best for you.

Now, the most difficult step you will need to take - stop borrowing.  You can’t pay off your debt if you continue to charge new items.  You’ve got to restrict yourself from charging any new items until your have paid down your debt to a reasonable amount. If you’re a credit card junkie, that level is probably zero. That amount is different for everyone, so only you can set that amount, but again - be honest with yourself.

Making the commitment to change old habits and facing reality are two of the hardest things you may ever do, but it is so important if you are going to find your way out of those rocky financial waters you may have found yourself in.  You can recover your financial footing by simply being honest with yourself, dealing with the facts, facing what is in front of you, and making a plan.  And remember, it’s always best to pay more than the minimum required payment for your credit cards or loans, so that more money goes towards the principle each month. Keep that and the rest of these tips in your mind and your financial health and independence will follow.

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