Debt is a big problem for many people and it often feels like there is no escape. It can cost a lot of money every month and it sometimes looks like it never goes down. Even worse is when the debt keeps getting bigger. The good news is there are ways to reduce your debt and make it easier to manage. We look at 15 ways to manage your debt.
Good debt and bad debt
Not all debt is bad. Good debt can help you to make money. Taking a loan for a house, if done correctly, is normally a good debt. A student loan, to study something that will help you make more money, can be a good debt.
Bad debt just costs you money and normally means you are buying things you can’t afford. Store cards, furniture accounts, and credit cards are good examples.
You want to try to be cautious with good debt and avoid bad debt as much as possible.
Why bad debt is harmful
There are two main reasons. The first is that the credit you are given which becomes debt allows you to buy things you can’t afford right now. If you have a clothing store account it is easy to go and buy a whole lot of clothes for yourself, friends, or family. This might take months, even years, to pay back. If you had to use cash you would probably not have spent so much. You might have even shopped around and found the same item at a lower price.
The second, and most dangerous issue, is interest. The store or bank gives you credit but it is not free. You have to pay it back with interest. This is the penalty they charge you every month for debt. You normally end up paying back way more than the cash price of the items you bought on credit. This is like throwing money away.
Why it is important to manage your debt
There are several reasons why it is important to manage your debt.
The first is that it costs a lot of money every month. The interest that you pay on debt is money wasted. It could be used to spend on things you want or need but you are paying it every month for something you already have. Debt wastes a lot of money.
Secondly, if the debt becomes too much to handle, which sadly happens to lots of people, it will cause you problems. There might be penalty charges for late payments which add to the cost.
It could also make your credit score worse. What this means is that when you apply for credit in the future you will either not be given credit or it might cost a lot more because the interest rate is higher.
If it gets really bad and you can’t pay your debts, some things might be repossessed. This means that the company that gave you the credit might come and take your car, your furniture, your home if you own it, or other items.
Another thing is that debt causes a lot of stress. If you spend a lot of time worrying about how much money you owe people it makes it harder to be positive and do a good job at work. This might affect your job, your health, and even your relationships.
What can be done to manage debt?
The good news is that there are many ways to manage your debt. It will take time and effort. You will need discipline and willpower but you can get your debt under control.
Here are 15 ways to manage your debt:
1. Understand your debt
The first step in getting your debt under control is to know exactly how much you owe each company and how much it costs you. Make a list of every account or debt that has to be paid. List the monthly repayments, the total outstanding amount, and the number of months remaining.
Also include the interest rate. Not all debts costs the same. Some will have a much higher interest rate than other debts. This means they cost you a lot more money over time.
Add all the columns up to see the total amount you need to pay monthly as well as the total amount of all the debt. It might be quite a shock to see it like that but it is important to know where you stand.
2. Draw up a budget
You now need to make a list of all of your monthly expenses. Be sure to include everything including your debts. Remember to include rent, electricity, transport, food, clothing, toiletries, medicine, school fees, cleaning materials, airtime, and any other expenses you have every month.
Even include an amount for unexpected expenses which happen to all of us. You should also budget for a few luxuries as we all need a treat now and then.
It is best if you can do this on a spreadsheet if you can but paper is also fine. At the top of the budget, put in your income. If you are doing this for a family or household, include all income and all expenses.
3. Consider your options
Once you have your budget and the breakdown of your debt, you can look at how to solve the problem. If your income is not enough to cover your expenses you have a big problem. The only two ways to fix this is to bring in more income or reduce expenses.
We will cover the first part a bit later but if your expenses are too high you need to look at where these can be reduced. You might have to make some sacrifices to get rid of debt.
4. Cut back if necessary
If your income is way less than your debt you might have to make big changes. This could mean selling a house or renting a less expensive home, selling a car and buying a cheaper model, and other options. This sacrifice will help you get out of debt before it gets worse. Once the problem is fixed you can always upgrade again so long as you are careful.
5. Stick to your budget
Now that you have done all the hard work and have a plan in place, stick to the budget. Do not go and have an expensive meal or a weekend away if it does not fit in the budget.
6. Start paying the debts
There are two ways of looking at this. Some people want to pay off the smaller debts first. This is not a bad idea as this will be easier to do and will mean one less debt. A better idea might be to pay more towards the more expensive debts, those with a higher interest rate. It might look like slow progress but will make a bigger difference in the long term.
7. Speak to the creditors
The creditors are the people you owe money to. Many people battle to pay their debts. When the creditors do not get any money in and they can’t talk to the person, they get nervous.
It is best to talk to them, explain the situation, and see if you can come to some sort of arrangement. Many will make a deal with you which will make it easier for you to pay off the money that you owe. Do not avoid them, that will only make things worse.
8. Avoid new debt
While you are trying to solve this problem, avoid new debt. Try to get rid of all cards and credit lines you might have. Only use credit in an extreme emergency.
9. Debt consolidation
One option, if you feel that you are drowning in debt, is to look at a debt consolidation loan. This is when you take a new loan and use the money to pay off all of your existing debt. The benefit is that you only have one amount to pay every month and, if done correctly, it should be less than the total of what you are paying now.
It is important to do your homework when looking at this option. You pay the money off over a longer period so it might cost you more in the long run. If you are having difficulty paying debts, it might take the pressure off and help to keep your credit rating good.
10. Sell things
If you have anything of value that you do not use or need, it is a good idea to sell in to reduce your debt. Again, try to pay off the most expensive debt first.
11. Earn an extra income
If times are tough and debt is overwhelming you, you might consider earning an extra income. Look for safe opportunities that will not get you into more debt. Use this money to pay off your expensive debt and watch the total come down.
While this takes extra time and effort it will reduce your stress and make you happier in the long run.
12. Use any extra money towards debt
People sometimes get a bonus, an inheritance, or some other source of extra money. The temptation is to enjoy it and buy something nice or go on holiday. Rather sacrifice the short-term enjoyment and use that money to pay off the debts that hang over your head.
13. Keep track of your progress
Look back at your budget as well as your list of debts often to make sure you are making progress. If you are doing a good job this will make you happy. If the problem is not getting better you might need to look at it again and make more drastic changes.
14. Reward yourself
Life can’t be all work and no play. If you have made progress with reducing debt there is no harm in a small treat now and then. Celebrate your success, just do not overdo it and don’t do it on credit.
15. Try to save a bit
While the main goal is to reduce debt it is always wise to save some money. This could be for later in life or for emergencies. Put a little bit away every month for saving.
Final thoughts
It is not easy to get out of debt but if you have a plan it can be done. Follow the steps above to manage your debt. This will leave you with more money to spend and less stress. Good luck.
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