Are you searching for practical ways to better manage your debt? Feeling overwhelmed by monthly payments and mounting interest? You’re not alone. Debt is something we all face, especially with the ongoing economic struggles from the COVID-19 pandemic.
Debt.org reports that the average American household now carries a debt of $137,063, with credit cards accounting for $8,398 of that amount. No wonder nearly 60 percent of Americans say debt is a significant stressor. Debt is a serious obligation, and failing to pay it back can have long-lasting consequences.
So, what can we do about it? Is debt something to be feared and avoided at all costs? Not necessarily. Debt is like fire—manageable and useful if handled correctly. Most loans provide essential financial support when needed, like purchasing a house. However, mishandling debt can lead to financial disaster.
In this guide, we’ll explore several strategies to help you better manage your debt, providing both immediate tips and sources for additional help.
One of the trickiest parts of debt is how easily we can fall into it, often due to aggressive advertising and media. However, it’s ultimately our responsibility when we swipe that credit card. To start, change your spending habits and go on a spending diet. Before any purchase, ask yourself:
1. Do I really need this?
2. Is this the best use of my money right now?
3. Can I afford it?
If you can’t answer yes to these questions, don’t make the purchase. This will help stop unnecessary money outflow and teach self-control.
Next, get a clear picture of your finances, particularly your debt. Just like investigators piecing together clues, you’ll need a comprehensive view of who you owe and how much. Make a list of your debts, including the amounts, interest rates, and due dates. This might seem overwhelming, but it’s crucial for creating an effective debt management plan.
Highlight any debts where you’re not making at least the minimum payment. Failing to meet this obligation significantly harms your credit score and results in additional interest and fees. Commit to paying at least the minimum amount each month. If you’re struggling, here’s how to find extra money in your budget.
Often, people believe they don’t have enough money to pay off debts, but this is rarely true. Your expenses are largely determined by your choices—where you live, what you drive, what you eat. It’s time to take control of your budget by listing all your income and expenses for the past six months. Assess which expenses are essential and which are not. Prioritize your spending and see how much can be redirected towards debt repayment.
If you can, try to send in more than the minimum payment each month. A small additional payment can significantly reduce the time it takes to pay off the debt and the interest you’ll owe. For example, an extra $50 a month on a $10,000 credit card debt can save almost a year in payments and over $1,000 in interest.
There are also two effective strategies for tackling debt without changing your budget—the debt snowball and debt avalanche methods. The debt snowball method involves paying off your smallest debts first and then moving on to larger ones, providing quick wins and motivation. The debt avalanche method targets debts with the highest interest rates first, saving more on interest in the long run. Both approaches help gain momentum by increasingly allocating more money towards remaining debts as each one is paid off.
To further reduce monthly payments, consider a balance transfer or negotiating a lower interest rate. Transferring debt to a credit card with a promotional low-interest rate can save money short-term. Alternatively, a simple call to your lender to negotiate a better rate can be incredibly effective and save significant interest over time.
Remember, you don’t have to navigate debt management alone. There are many resources available for help, including credit counseling services, debt management plans, and debt consolidation loans. Credit counseling agencies, often non-profit, can provide a comprehensive overview of your financial situation and suggest personalized solutions. Debt consolidation offers one larger loan at a lower interest rate to cover existing debts, making repayments more manageable. Debt settlement services negotiate with creditors to reduce the amount owed—though be cautious, as this can impact your credit score.
In extreme cases, bankruptcy might be an option. However, this should be a last resort, as it has long-term impacts on your credit score and financial future.
Ultimately, the best way to manage debt is to avoid it in the first place. Develop good money habits, take charge of your finances, and always be critical of your spending. Remember, learning from past mistakes can prevent future financial difficulties. Stay focused on becoming debt-free, and you’ll achieve it over time.
