Debt is the proverbial bugbear that every household in the world faces. It is a four-letter word with more bite than the most vulgar words in the dictionary, but with the right approach it can be managed effectively and eventually controlled. Debt is unavoidable. It provides individuals, families, and corporations with the necessary funds for everyday purchases, and big-ticket items too. Many people have multiple lines of credit available to them, and managing that credit becomes an insurmountable challenge.
Various strategies have been proposed to assist individuals in lessening their overall debt burden, and moving towards financial independence. Debt can build up quickly, or the buildup can take place over several years. In any event, careful management is essential to ensure continued lines of credit, psychological well-being, and financial independence. The process of becoming debt-free requires a careful review of all finances. We all have a basic understanding of our income, debt and expenses.
The first step in the process of becoming debt-free requires an understanding of gross pay. Once all fixed expenses have been factored in, including retirement and savings, the discretionary income can be calculated. This is the money that is available for spending purposes. People tend to underestimate their financial obligations and debts, thereby overextending themselves when it comes to purchases. It’s important to document every single debt, the interest rate on that debt, and the minimum monthly payment due on a specific date. A debt elimination plan requires nothing less than brutal honesty.
Work towards reducing monthly expenses
If personal disposable income typically remains in a tight range, it’s important to begin reducing variable expenses, or even eliminating them entirely. Many monthly expenses are not required such as unused gym memberships, video streaming memberships, massage or day spa memberships that lie dormant and the like. It may be necessary to simply eliminate certain expense items even if they are being used. Part of the problem with debt reduction is that many people refuse to budge on lifestyle standards. It may not be public knowledge, but hospitals, insurance companies, cell phone providers, and cable TV companies often have more affordable options for their clients. The next step in the process is prioritizing the most important debt. Naturally, home mortgages are priority #1. Car repayments are another priority, provided the vehicle being financed is not a luxury vehicle that is unaffordable. Funds should be directed away from unnecessary expenditures towards the priority items.
This is pretty much the same way the human body functions in times of a crisis. When a human being is stranded in a blizzard, the extremities are sacrificed to maintain the core organs such as the heart, liver, lungs, kidneys, brain etc. All resources should be redirected to the most important items – this is a nonnegotiable point. When it comes down to making payments on debt, there are different thought processes to becoming debt free. Some credit management experts advise paying down the smallest items first. These incremental victories provide the necessary momentum to manage debt.
Contrarian Debt Repayment Plans
Other experts advise paying down debt with the highest interest rate, and this certainly makes sense. Higher interest rates suck up more of your personal disposable income, rendering you poorer every month. Once the broad strategy has been mapped out, it’s important to schedule payments to creditors. Writing out checks every month is a timely and inefficient way of making payments. It is best to schedule payments prior to their due date, so that no late fees will be incurred if the payment doesn’t go through.
Experts also advise avoiding making large payments all on the same date, especially when smaller payments can be made infrequently. Throughout it all, it’s important to avoid racking up more debt. Some folks believe that it is best to cancel credit cards that are not being used to avoid the enticement of using them. However, this may hurt your credit score by lowering the debt-to-credit ratio. Remember: It’s best to use cash available in your account over credit any day of the week.