Debt Management
Got Debt?
Debt happens. Some debt is acceptable, even considered good (tax deductible or installment debt) – like home loans or student loans. But most debt is not good – credit cards, high-rate auto loans, high-rate individualized loans, appliance loans, and other debts. Some people would consider any debt at all to be bad debt. Depends on who you talk to.
There are two basic debt resolution choices: permanent and temporary. For long-term debt reduction, use both.
Budgeting is a permanent debt solution.
If you’re truly dedicated to getting out of debt and staying there, there is only one permanent debt solution – stop spending more than you make. Obviously most people can’t expect to buy a house or go to college without incurring debt, which is why those debts are considered good. But you can stop acquiring bad debt if you reorganize your finances.
It’s difficult, but you can teach yourself to break away from our accumulation culture and stop the spending cycle. First assess your necessity categories like food, housing, transportation, and childcare. Although you can’t cut those expenses, you can make better choices.
Start clipping coupons for products you regularly buy, but don’t use a coupon to buy a product you wouldn’t otherwise use. Be willing to try other brands if they’ll save you money. Often a generic brand is manufactured by the name-brand manufacturer, so why not save a few dollars and get the same product for less? If you drive a gas-guzzling car, trade it in for a fuel-sipper. Chances are your payments will be the same, but you’ll save a lot on gas.
You can also significantly cut your non-necessity expenses. For example, if you have cable TV, do you really watch those premium channels? If not, cancel them. You can always re-subscribe once you’re out of debt, but you may discover you don’t want them anymore. If you have a good-quality pair of jeans that you like, do you really need a new designer pair just because they’re on sale? Train yourself not to make impulse purchases or respond to advertising tricks and you’ll be much happier in the long run.
Debt Consolidation: A Temporary Debt Solution
Once you’ve cut your expenses enough to the point where you can afford debt payments that will reduce your debt rather than maintain it, consider another debt solution like debt consolidation. Credit card interest rates are very high, often 18% or more. If you qualify for a debt consolidation loan, you could cut that rate in half. Although adding your debts together may produce a debt that’s alarmingly high, you’ll also enjoy the satisfaction of watching your single payment quickly shrink that debt.
There are two keys to successfully reducing debt through debt consolidation: 1. Pay as much as you can every month, and 2. Stop creating new debt. Once you consolidate your debts, cut up the cards you used to make the original purchases. Stop buying new non-necessities until your debt is gone.
Once the debt is gone, carefully look at your budget. Set aside a portion of your previous debt payment to create an emergency fund. That way you won’t get back into debt if you suffer a medical emergency or illness, need emergency car repairs, or your house needs maintenance. Set aside another portion of your former debt payments for retirement. If you’ve been living comfortably while paying your debt, there’s no need to return to your former spending level. Living on less than you earn and saving the difference will create true wealth.
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