Debt can be a double-edged sword. When used with control, it can help drag you out of tough financial positions and improve your life. If it accumulates, however, it could expose you to a lot of stress. From struggling to repay your debt to receiving never-ending phone calls from lenders, having accumulated a lot of debt can turn into a nightmare. The good thing is that it’s possible to manage your debt with the right level of discipline.
The first step towards managing debt is to create a debt management plan. You need to know how much you owe, the repayment dates, and the interest in each loan. You also need to identify your debt to income ratio. The higher your income is in comparison to your debt, the easier it will be to settle your dues. The trick is to use the right strategy.
Here are a few tips for debt management worth following:
Stop Accumulating Debt
The more debt you accumulate, the harder it becomes to cut it down. Getting approved for new loans can be a habit, but it is essential that you stop accumulating more debt. This includes avoiding the use of credit cards. Start with creating a comprehensive budget of your expenses. As long as you can track your money, you can avoid unnecessary expenses that lead to you applying for more loans or credit cards.
A great tip for managing debt is to make it harder for you to accumulate more debt. For instance, you can leave your credit card at home to fight off impulse buying. You can also avoid adding your credit details to your favorite online stores to make it harder to shop with your credit card.
Among the most effective ways to curb your debt tendencies is to freeze your credit. This helps restrict access to your credit report and a great option for fighting against identity theft.
While paying minimum balances helps protect your credit and keep you in good standings with lenders, it contributes very little towards managing your debt. You need to be disciplined enough to prioritize your debt repayment. There are many debt management plans worth following.
The first plan is the debt snowball method. This is where you make as many payments to your smallest debts first while making minimum payments to the larger ones. Once you complete repaying the smallest loan, you can prioritize repaying the next smallest. This method is ideal if you are looking for debt repayment motivation.
However, the debt avalanche method is the more financially sound alternative. It ensures that you pay off the loan with the highest interest rate as much as possible. You can then start paying the next highest-interest-rate loan once you are done with it. While this method isn’t as motivating, it reduces the amount of interest that can accrue.
Consider Debt Consolidation
It can be tricky to track the loan repayment details from multiple lenders, let alone excel at managing debt. At the same time, missing a few payments could reduce your credit score and result in frustrating interactions with lenders. If you feel like you are servicing multiple loans that are tough to manage simultaneously, consider debt consolidation.
This is where you take out one major loan to pay off all your other loans. With the other loans gone, you will be left servicing one loan with manageable repayment terms. This plan can be especially helpful if the new loan has a lower interest rate or better repayment terms.
Increase Your Income
If your debt-to-income ratio is poor, increasing your income can help in managing debt. Since you didn’t have the extra source of income before, any cash generated from it should go into debt repayment. You can choose to work another job to increase your income or consider working with a financial advisor on how best to get started on investing the money you do have.
Among the best tips for debt management is to look for passive income sources. These are income streams that will generate revenue without you being excessively involved in them. Some great examples are affiliate marketing and dropshipping.
Create an Emergency Fund
Nothing can be more frustrating than finding yourself in a financial emergency as you are working towards managing your debt. For instance, you could lose your job, which will complicate your financial situation. You might be required to get an ad hoc loan, taking you back to square one. This is where a rainy-day fund comes into play. It will allow you to handle financial emergencies without getting into any more debt.
You can save anywhere between three to six months of income, but this will require time and financial responsibility. Among the best debt management plans is to use the 50-30-20 budgeting rule. 50% of your income goes into necessities like debt repayment and utility bills, 30% goes into wants, and 20% goes into savings. You can place these funds in a locked savings account or invest them somewhere for optimal growth.
Track Your Progress Constantly
While some of these suggestions might seem straightforward, like creating an emergency fund, they are essential for building a strong financial foundation. From this foundation, you can build your way out of debt. Remember to keep track of your progress, as this will motivate you to keep managing your debt.