6 Tips for Successfully Managing Your Debt
Sunday, August 23, 2020, 6:00 AM | Leave Comment
As people amass debt throughout their lives, they find that it’s more difficult to pay off those debts than they anticipated.
This leads to crippling debt that will eventually result in a very poor credit rating.
Before you reach that point, following these six steps can help you improve your financial profile.
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Create a Budget
You can’t make any progress towards managing your debts if you don’t first start out with a budget. Your budget should resemble a worksheet that you can consult on a day to day basis to ensure you are following it as a financial guide. This will likely mean amending the budget as things in your life change.
If you have a baby, you may need to put more of your income towards grocery shopping. If you get a raise, this should also be reflected in your budget. Following your budget will allow you to meet all of your financial obligations and pay off your debts.
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Restrict Additional Spending
You’ll have additional expenses that you probably didn’t put into your budget. This can be anything from picking up that cup of coffee on your way to work to buy a pack of gum on a whim. Whenever possible, you should eliminate these expenses, so your spending money will build up over time.
You can use the money you save to pay for date night with your spouse, take your kids to the movies, or to bulk up your savings account. Believe it or not, small purchases add up over time.
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Start a Savings Account
Even though you have debts to manage, you should also be starting a savings account. You don’t have to contribute hundreds of dollars at once, but you should be depositing something from each paycheck. Ideally, you should be contributing 10% of each paycheck to your savings account, but you may need to pay off your debts first.
The goal is to build up savings that’s equivalent to six months of spending. If you typically spend $5,000 a month on all of your expenses, you should maintain a $30,000 balance in your savings account.
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Make All Payments on Time
It’s essential that you make all of your payments on time, including utilities, loans, and credit card payments. Even financial obligations that won’t normally be included in your credit report will result in a negative hit when a payment is late. Just one late payment can bring down your score and undo all of the progress you have made.
Additionally, a late payment will usually result in fees and penalties that will contribute to your pre-existing debts. In that way, making your payments on time can actually save you money.
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Start Paying Off Your Debts
At this point, you should be ready to develop a plan for repaying your debts. You may know that making the minimum payment won’t get you anywhere and will actually increase what you owe by causing interest charges to accumulate.
However, you might also feel as though paying off those debts are next to impossible. That’s not true. You can work with a debt settlement service to reduce what owe, and that can be a tremendous help.
Additionally, you should create a strategy for paying more than the required minimums to your creditors. The best method for doing this is called the snowball strategy. This involves choosing your smallest debt and paying extra on that each month until it has been paid off. Meanwhile, be sure to pay the required minimums on your other debts.
The money you dedicated to paying off the smallest debt can now be used to pay off the next smallest debt. You continue this process, building up what you can contribute to each debt in the same way that a snowball gets larger as it rolls down a hill. Ultimately, you’ll have no debts, and you can contribute that money to your savings account each month.
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Ditch the Plastic
Finally, you’re ready to get rid of your credit cards. You won’t need them as long as you continue contributing to your savings and retirement accounts. You should keep just one credit card to use occasionally to help you maintain your credit score.
However, remember to make very small purchases with it and repay it within the same billing cycle. This strategy allows you to build credit without accruing those interest charges.
While following this strategy will take some time, it’s the best way for you to manage your debts and restore yourself to good financial standing.
If you make mistakes along the way, such as missing a payment or charging a new purchase, move past those mistakes, and resume your debt management strategy. As long as you keep working at it, you’ll be able to manage your debts more successfully in time.
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