Nearly everyone has some type of debt. Whether it's a mortgage, a car loan, or credit card bills, the vast majority of consumers have financial obligations which need to be met on a regular basis. For many people, managing their personal debt is a difficult and frustrating experience. All too often the process involves spending every bit of monthly income on bills and living expenses and then hoping there is enough left over for food and gasoline. Add to that the constant stress of knowing that if a financial emergency were to happen, you would have no way to cover it. It's a risky and unhealthy way to manage your money.
Having debt is a fact of life. The real challenge facing most consumers is knowing how to manage their personal debt successfully. Taking control of your personal debt is one of the best ways to ensure you will reach your financial goals. It also enables you to build and maintain a strong credit history which, in turn, results in lower financing charges for you.
The good news is that almost everyone can learn to be a better money manager. It does require patience and time but the rewards are worth it. You work hard for your money. Shouldn't you be the one who decides where it goes and for what? Paying enormous amounts of money to creditors in the form of interest charges, late fees, or over-limit charges should be incentive enough to get you started on the road to financial independence!
Where to Begin
It's nearly impossible to manage your debt if you don't know how much you owe. So the first thing you need to do is make a list of all your income (money coming in) and all of your expenditures (money going out) for each month.
Your list should have two columns. List one as "income" and the other as "expenses". Include all sources of income such as take-home salary (not gross), alimony, Social Security, or any other regular payments you receive. Now list your expenses. These would be rent/mortgage, car loan payments, all utility bills, and any insurance bills. Also write down what you spend for groceries, clothing, eating out, movies, and gasoline.
A really good habit to start (if you're not already doing it) is to save all your receipts. FOR EVERYTHING. This can be as easy as getting a shoe box and putting your receipts in it every night. At the end of the month, go over them. This will give you a clear indication of what you are spending and exactly what you are buying. Many people are surprised to find that what they estimate their expenses to be and what they really are, are two separate things. Saving receipts is a great reality-check.
Obviously, some debt is more important than others. Your mortgage or rent payment will probably be the #1 priority on your list. Then will come car loans, utilities, and food. After you calculate the amount you spend on these necessities every month, you can then look at how much money you have left (if any) and see where you can cut costs. If you have a partner or family, it's important that everyone understands the overall financial picture and is actively involved and working toward the same goals.
There are many small changes you can make in your spending habits which can yield big results over time. The following are simple suggestions to help you get started:
- Cut back on eating out. Cooking at home is almost always less expensive than going to a restaurant. This can be accomplished more easily if you plan meals in advance and shop ahead of time.
- Get rid of your cable service. Monthly cable bills can be expensive. Most TV programs and movies are now available through online streaming services. Movies and games can also be rented at a low cost.
- Sell what you're not using or wearing. Yard sales are a great way to get rid of "stuff" that is taking up space but is never used. Take the profits and add them to or open a savings account. Having extra cash doesn't translate into having more spending money. It's all about saving!
- Check out activities that are free and fun. Entertainment doesn't have to be expensive. Hiking and bike trails are available in most locations at no cost- plus you get the added benefit of physical exercise! Many communities hold art festivals and other cultural events on the weekends with no admission fees. Museums generally offer free or deeply discounted admission tickets at some time each month. With a bit of research and planning you can continue to enjoy quality entertainment that doesn't wreck your budget.
- Make lists before you shop. Whether you're headed to the supermarket or the drug store, make a detailed list of what you need. This simple act can keep you focused and help prevent "impulse" purchases (which can quickly undermine all of your good intentions). Clip coupons. Look for weekly sales. Small savings add up.
Important Facts Worth Knowing
Here are some important points to consider when learning how to successfully manage your personal debt.
- Most Americans are overwhelmed with credit card debt. According to CreditCards.com, the average American household with at least one credit card is currently carrying nearly $16,000.00 in outstanding credit card debt. Considering that most cards charge between 15-20% interest (and sometimes more), that's a lot of money being wasted on old purchases.
- There is good and bad debt. Good debt is usually considered borrowing for something that will increase in value or has proven worth. A mortgage or student loan would be considered good debt. On the other hand, using a credit card to pay for items which are quickly used such as vacations or dining out, fall into the bad debt category. If you can control your credit card spending so that you pay off the entire amount each month, that is acceptable. This means that you will not be hit with any interest charges. If you feel that you can't control your credit card spending, use cash for purchases.
- Control your spending. Keep every receipt and go over them weekly. The results will probably surprise you. Most people have no idea how much they really spend. To be successful at controlling your spending, you have to know how much you're spending and what you're buying. Cut down on things you don't really need and start saving!
- Pay off debts with the highest interest rates first. In the beginning, pay more towards these outstanding debts while paying the minimum on your other lower interest debts. Once these debts are lowered, increase other payments. Avoid paying the minimum amount on credit card debt. It will take you years to pay off the outstanding balance and you will pay thousands of dollars in interest payments.
- Plan for financial emergencies. It's a known fact that financial emergencies always seem to happen at the least opportune time. Whether it's a car repair or a medical bill, any out-of-the- ordinary monetary need can prove disastrous if you don't have savings to rely on. Your goal should be to have three to six months of living expenses to fall back on in case of an emergency. This should not be confused with saving for a vacation, flat-screen TV, or any other consumer product. Your emergency savings are for emergencies only!
- Don't use all of your cash to pay down your mortgage. If you have other debt, work on paying it down first. More than likely, your mortgage has a lower interest rate than your other outstanding debt and much of it may be tax deductible.
- Don't take on new debt. Controlling your spending means cutting back, not adding on. Put away the credit cards and use cash when making purchases. Studies have shown that people consider a purchase more carefully and tend to spend less when using cash. Calculate a reasonable amount of money you need for a week and use it to pay for items rather than using a credit card. Do not take additional money when you are running low. The whole point is to learn to manage your money and make smart financial decisions.