Do you cringe when the telephone rings, fearing that it is yet another collection agency? Do you have trouble sleeping at night, worrying about how you are going to meet all of your financial obligations? Do you take a cash advance from one credit card to make the minimum payment on another credit card? If so, you are letting your debt manage you.
Debt can be a useful tool, but only if you use it properly. These simple steps will help you manage your debt and get ahead, rather than constantly being bogged down by high fees and higher interest rates.
Limit Your New Debt
Your first step is to limit all new debt to “good” debt. Good debt is debt that helps you accomplish your long-term goals. This type of debt includes the mortgage that allows you to purchase your home and student loans that allow you to obtain a college degree or technical certification. Good debt can also include a car payment if the purpose of the car is to help you get to work or school.
Keep in mind that even good debt has its pitfalls and should be limited to an amount that you can comfortably afford. Mortgage debt no longer qualifies as good debt if you’ve borrowed more than you can realistically pay back. Taking on tens of thousands of dollars in student loan debt may not make sense if your degree is in a field with relatively low wages.
You should consider other ways to accomplish your goals than taking on significant amounts of debt. You can always buy a smaller home or a less expensive automobile. You may be able to obtain financial assistance or save money by attending a state university or community college. The key is to be realistic about the amount of debt that you can reasonably take on.
Establish an Emergency Fund
When you don’t have an emergency fund, small emergencies can turn into costly nightmares very quickly. Having to pay for a new water heater is bad enough. It is worse if you have to charge the repair on a credit card with a high interest rate, and it becomes a disaster when you can only afford to make the minimum payment on that credit card. You’ll then be paying for that water heater for years to come, which makes it all the more difficult for you to get ahead.
You’ll sleep much easier if you can accumulate, in a savings or money market account, enough money to pay for most common emergencies. Many experts suggest that one thousand dollars is an appropriate amount. If you can manage to save twenty dollars per week, you’ll have your emergency fund in less than a year.
The key is to only use your fund for true emergencies. Emergencies do not include buying the latest electronic device or the most stylish pair of shoes. If you have to use your emergency fund, start making your weekly contributions again until your balance is at its previous level.
Pay Off Your Existing Debt
Once you have established a small emergency fund, you should begin paying down your existing debt. You will first need to write down each of your debts, including how much money you owe and the interest rate that applies to the debt. Since your credit cards will generally have the highest interest rates, you should start with those first.
One popular method of paying off credit cards is to start with the card with the smallest balance. Figure out how much extra you can afford to pay each month. Then make the minimum payments on all of your other credit cards while sending in the extra payment to the card with the smallest balance. Once that card is paid off, send the amount that you were paying to that card to the card with the next highest balance.
You should make all minimum payments in a timely manner, since late fees and penalties can significantly increase your debt. You should also contact each of your credit card companies to see if they will lower the interest rate that you are paying. A reduction in your interest rate will help you pay off your credit cards that much faster.
Accomplish Your Long-Term Goals
Once you taken control of your debt, you can move on to your other long-term goals. Without the interest, penalties and fees taking a bite out of your take-home pay, you may be able to increase your emergency fund so that you can feel more secure in the event of an illness or lay-off. You may also be able to set aside money for your retirement or for your children’s college education.
You will be surprised to find that taking the steps to manage your debt can improve many other areas of your life. You’ll be able to sleep better, which means that you may be happier and more productive. You won’t be as stressed, so your relationships with your spouse, children or other loved ones may improve. You’ll find that managing your debt is a lot more fun that having your debt manage you.