Debt is an undesirable obligation to owe for so many reasons. The accruing interest rates on the debt does not help matters. Most times, owing debts is not a result of irresponsibility or extravagance, you can also borrow money for genuine pressing matters. The need for the funds most times do not allow you to think of the implication of the interest rates and the means of servicing the debt. Debts could come in the form of credit card debts, mortgages, business loans, car loans, and so many others. Most times, people that borrow do not have comfortable means of servicing the debt, which is where a debt management strategy comes to play. To service your debts with relative ease, you need a debt management strategy that will structure your finances in such a way that it pays attention to your debts and also ensures that your everyday needs are catered for and prevents you from taking more loans. This article will discuss a few steps to take in developing an effective debt management strategy.
What Is Debt Management Strategy?
A debt management strategy is a way of getting your debt situation under control through financial planning and budgeting. A debt management strategy helps you minimize your current debt obligations with the aim of eliminating your debt profile after a set period and it also ensures you have a proper financial plan to manage any future credit facility you may want to take.
When it comes to your financial plan, it is important to create a section to manage your debt. Too many debt obligations may hinder your financial progress and prevent you from achieving your financial goals. A debt management strategy takes care of your debt obligations without hampering your financial plan by giving it a much-needed structure. A debt management strategy is a way to keep up with your debts and current bills. There are different strategies you can use to manage your debt. You can develop a strategy on your own or work with a financial expert to ensure that your debt management plan aligns with your financial plan.
A DIY Debt Management Strategy
You may decide to develop your debt management strategy by yourself which is not a bad idea in itself. One way to go about it is by creating a budget for yourself that will make provisions for settling your debts and still allow you to settle your daily bills and needs. This will ensure you are financially stable while you are settling your debts. You can use budget calculators, repayment calculators, and financial management apps to track the progress of your strategy. Some DIY strategies include debt snowball and debt avalanche. You can also negotiate with your creditors on a repayment plan that will be convenient for both parties.
Debt Management Prepared By A Credit Counselor
There are for-profit and non-profit credit counsellors you can engage to help you sort out your debt situation by preparing an effective debt management strategy. A credit counsellor will come up with a plan to repay your debts and also negotiate with your creditors on your behalf.
How Can I Reduce My Personal Debt Quickly?
Debt obligations can put you in an undesirable position which could distort your daily living. Asides from hampering your daily expenses, it can also hinder your savings and investment plans which may prevent your wealth from growing. The best way to overcome this is to come up with a debt management strategy that will eliminate your debts while still allowing you to meet your short-term financial needs and also have a long-term financial plan. A debt management strategy is part of a comprehensive plan that helps you take care of your debt while you secure your future. Consistency is also an important ingredient that will ensure the success of your debt management strategy. You can adopt some of the debt management strategies below to help you take care of your debt situation.
Stop Accumulating Debts
The first step to getting out of a bad situation is to stop putting yourself into that situation in the first place. When it comes to debt, it is not about the principal sum but the accruing interest rate. Although this strategy won’t get you out of debt, it will, however, prevent you from entering into more debt. It may be a difficult habit to break, especially with credit cards, but you can stop accumulating debts by creating a budget for yourself to prevent you from spending beyond your limit. You can also freeze your credit to prevent you from applying for new credit on impulse. This is an important first step in the journey of getting out of debt.
Increase Your Income
In order to meet up with your debt obligations, you need to free up money, create a budget and also earn more. This is very important because it ensures that you are able to meet your short-term financial needs and still have enough money to service your debts. Waiting for a promotion may not be the answer because you don’t know when that will be. Get some digital skills or start your side business to increase your income. Another way to also ensure an increase in your income is to take advantage of different tax benefits at your disposal so you can divert the tax refund into servicing your debts.
Make The Extra Effort
Settling your debt will require a lot of discipline, both from your spending and commitment. When you come up with your debt strategy and earmark the periodic payment, make that extra effort, when possible, to pay more than the set minimum payment. Paying more than the set minimum will save you money on interest and help you get out of your debt faster. For example, you have a $10,000 balance on your credit card with a 15% interest rate and a $500 minimum payment. If you pay the minimum, it will take you almost 3 years to pay up with $4,500 in interest. However, if you pay $600 a month, the $100 extra means it will take you less than 2 years to pay up with just $3,500 interest or less. There is a great advantage in making that extra payment.
Build An Emergency Fund
Having an emergency fund in the middle of settling your debt might seem like a bad idea. You may be asking yourself, why set aside an emergency fund when I can easily channel the fund into paying my debt? What an emergency fund does is to keep you from entering more debt which ties back to the first strategy of avoiding more debt. It serves as a safety net for when there is an emergency and you do not want to touch your investment or borrow more money. An ideal emergency fund hold between 6 to 12 months of living expenses. You can set aside whatever is convenient for you monthly to build up your emergency fund. Anywhere from $1,000 monthly should do.
Consider Debt Consolidation
This is a smart debt management strategy that depends on some variables. If you have high-interest rate debts, you can consider this strategy to accelerate your payment. When you consolidate your debts, you can then take out a from a bank or reliable lender to service these debts all at once, leaving you with only one debt to pay. It will be an advantage if you have good credit or someone with good credit that can guarantee you so you can qualify for a debt consolidation loan which usually has lower interest rates than all your other debts. This strategy will help you pay your debt faster and save you more money.
Negotiate With Your Creditor For Lower Interest Rate
The effect of interest rate on debts can be so frustrating, it is the reason most people do not settle their debt on time. Sometimes, it almost seems as though your payments go towards the interest rate rather than the principal sum. If you have a good payment history, you can negotiate with your creditor to lower the interest rate. Though it is at the discretion of the creditor, a good payment history puts you at an advantage.
Negotiate For A Lump Sum Payment Less Than You Owe
This always seems like a long shot but it works, especially if you use 3rd party negotiator companies that specialize in this area of debt management. They'll call your creditors to negotiate the settlement of your debt for less than you owe. Take note that some debt settlement companies may ask you to stop payment during negotiations for better terms. This can impact negatively your credit score. Be sure to continue payment until a new term of payment is agreed upon.
Take From Your Retirement Fund or Life Insurance Policy
These are risky strategies that may turn out badly because they will mean touching your future investment for yourself and your beneficiaries. When you withdraw from your retirement account to pay off your debt, it puts you at risk because if you end up leaving your employer, you may have to also refund your employer in an expedited time frame that may further put you in a precarious debt situation. Also, when you retire, you may not have enough funds to fulfil your post-retirement lifestyle because you would have missed out on interests, dividends and capital gains. When you cash out from your life insurance portfolio, it exposes you to some tax obligations and may also affect the benefits accruable to your beneficiaries. These strategies are risky but may be worth the risk if you weigh your options carefully.
Debt Snowball Strategy
With this strategy, you will make the minimum payment on all your debt except for the smallest one, which you will pay as much as you can. This strategy allows you to eliminate your smallest debt quickly and move on to the next smallest debt while maintaining minimum payment on other debts. It stabilizes your debt structure while eliminating it little by little, from the smallest. This strategy may not work for a payday loan or a title loan.
Debt Avalanche Strategy
This debt management strategy is effective when you have extra cash. It helps you maximize the extra cash towards settling your debt. For this strategy to work, make a list of your debts in descending order, from the one with the highest interest rate to the lowest. You will make the required minimum payment on all your debts, you will make an extra payment towards the debt with the highest interest rate. This is the opposite of the snowball strategy. When you pay up the debt with the highest interest rate, you will move on to the next highest and state making more than the minimum payment. You will continue this process until all your debt is paid. This strategy allows you to save money by tackling the debt with the highest interest rate first.
Track Your Progress
This is more of a tip than a strategy. It is easy to lose momentum with paying your debt, especially when it is frustrating and denying you of your financial goals. To keep yourself motivated, track your progress through weekly or monthly check-ins. You can also keep a chart or spreadsheet of your payments to remind yourself of how far you've come. This will keep the momentum and ensure you pay up your debts on time.
Debt Management Strategy Conclusion
These debt management strategies can be effective if you follow through on them. While some of the strategies might seem insignificant, they are all essential in the bigger picture of being debt-free. You have a choice of engaging the services of a debt management professional to execute some of these strategies for a better advantage. It is best to clear your debt at this young age so you can enjoy your retirement in peace.