Debt is a crucial part of modern life which can’t be avoided. Many people think that taking debt can be a burden over them. But if managed efficiently, debt can help you to create your assets. Before taking debt, it is essential to learn about the debt management. Debt Management is important for maintaining financial health and to achieve long term goals. Let us first learn about the basics of debt.
Debt means borrowing money from a person or an organization known as lender with a promise to repay it within a stipulated time along with the interest. There are two types of debt –
- Secured – Secured debt includes some collateral such as house or a car, which makes it less risky for lenders. It has lower interest rates as compared to other loans.
- Unsecured – Unsecured debt doesn’t have any collateral due to which it is riskier and has higher interest rates than usual. For example, credit card debt or personal loans.
Strategies for Debt Management –
- Assessing your debt situation – The first step in managing debt is to have a detailed information about all your debts. Create a list of all debts including credit card debts, short term and long-term debts. In this way, we will have a complete idea of how much amount is due to all the lenders. Find out the interest rates of all these loans. Mention the due dates of each debt which will help to plan our repayment strategy. Having all these data will create a clear picture about your debts and will help to create a priority list of all the debts.
- Create a budget – Creating a budget is important for debt management. Budget helps to create a detailed statement of all your incomes and expenses. Through this, we will have a complete analyzation of all the expenses. Find out all the unnecessary expenses and eliminate them. Then, allocate a fixed amount of income towards debt repayment. It will help to reduce your debt gradually.
- Debt repayment strategies – There are majorly two types of strategies –
- Debt Snowball method – Debt snowball method states you to pay off smaller debts first. Utilize major income to pay off smaller debts and spend minimum on larger debts. In this way, one by one you will be free from smaller debts and will reduce your number of loans. This will motivate you to pay off your other debts and will reduce your financial stress.
- Debt Avalanche method – Debt Avalanche method states you to pay off the debts having higher interest rates first and spend minimum on loans having lower interest rates. This will reduce the money on interest over time and will help to decrease your financial burden more quickly.
- Consolidating debt – Debt consolidation means combining multiple debts into a single new loan with lower interest rate. The loan amount will be used to repay all the debts completely. Now, you will be having only one loan to pay off and only one monthly payment will be there. This will simplify your repayment process as you have to manage only one loan instead of managing many different loans and remembering the details of multiple debts. It also reduces your interest compounding over time. But don’t make it as a habit as it can lead to fall in debt trap.
- Negotiating with creditors – If you are struggling with repayment of your loans then coordinate with your creditors. Try to negotiate with them and find some solution for this. You can increase your repayment term so that you have more time to organize funds for your debts. You can also settle your complete debt in a single lump sum amount. Communicate all the things with your creditors and mention that in a written agreement.
- Seek professional help – Sometimes it becomes a confusing task to manage multiple debts. When you don’t have professional financial knowledge, it becomes a cumbersome task to create a repayment strategy. You can take help from credit counseling agency or any financial advisor. They will give you personalized advice and give you debt management plan. They will also negotiate with creditors on your behalf. Try to take help from reputed organizations only as there are higher chances of financial scams in this case.
- Build emergency funds – Always maintain emergency funds to save yourself from uncertain situations. Try not use credit cards in case of emergencies. Keep savings worth of 3 to 6 months of living expenses. This will help you in the case of job loss or any medical emergency. For building emergency fund, start from a small amount then gradually increase this amount with time.
- Stay disciplined and motivated – Debt management is a long-term continuous process which requires patience and consistency. One needs to be disciplined to save more amount and use it for debt repayment. Always celebrate small wins such as paying off credit card bill. These wins will keep you motivated for long term goals. The most thing in debt management is to try to remain debt free as much as possible to reduce your financial stress.
- Avoiding future debts – One thing to be kept in mind in the process of debt management is to try to avoid future debts as much as possible. Once you get free from all your debts, try not to create any new debt. Eliminate your unnecessary expenses which will add on to your savings and emergency fund. Use emergency funds in the case of uncertainties instead of taking a new loan. Make saving as your habit and increase it gradually. Create an effective budget and stick onto it.
Debt can’t be avoided but can be managed effectively. It requires patience, commitment and strategic planning. By creating a proper budget, understanding the details about the debt and utilizing repayment strategies, one can take control of the financial situation and work towards a debt-free future. Take help from professionals if needed, build emergency fund and stay disciplined in your efforts.
