You may think that once your debt relief strategy is implemented, the picture is complete. However, your plan is really just the beginning, the foundation of a continuing path. One of life’s ongoing challenges is developing effective financial strategies that will guide you in the right direction. Each stage of your life can create new financial challenges. No matter how much money you make, the earlier and more completely you master the finances in your life, the more likely you are to achieve what everyone wants—a financially comfortable today and a financially secure tomorrow. It is important to consider the steps that could lead you on the right or wrong path.
The Right Path
Assessing what you owe
Start by making a list of all your debts. Break them down into short-term (e.g., credit cards), intermediate-term (e.g., car/student loans), and long-term (e.g., mortgage) debt. Put long-term debt at the top of your list and short-term debt at the bottom. By categorizing what you owe, you’ve quickly identified your current financial situation – laying the groundwork for how to get out of debt.
Begin thinking more cost-effectively
Our own mind works against us when it comes to savings and budgeting. Psychologists have shown that we have, at best, a vague sense of what is in our account, and the wide availability of credit and debit cards have made it easier to spend ourselves into a hole.
If you lay out your budget you will have what you spend, and where you spend it, at the forefront of your mind. Instead of aimlessly slapping down your credit card, you will carefully consider the long-term effects before moving forward with a purchase. Sacrificing short term pleasure for long term happiness is a critical step.
Slashing your credit card balances
Concentrate on the short-term debt at the bottom of your list first. It is important to pay off higher interest rate, short-term debt as soon as you can (e.g., credit cards) because the interest that accumulates by stretching out payments over time can make “bargain” purchases cost a lot more. For example, say you have a credit card with a 17.9% finance charge and your balance is $1,000. Making a minimum payment of $20 per month for the next year will only reduce your balance by $66.26. That means you would be paying $240 in exchange for a $66 reduction in your debt. So, when you make only minimum monthly payments, you are throwing money away. Remember this bit of credit card help: the money you save by paying off high-interest credit cards could be used to build your nest egg.
Understanding your spending habits
At times, financial problems may remain unseen until a monthly budget exposes them. Interpreting your income and expenses on a monthly basis is the first step towards meeting your long-term financial goals. How often do you look at your overall spending? By assessing your spending patterns, you will become more aware of where and when to hold back. You may be surprised to find that little indulgences, such as buying a daily coffee or going out to dinner, accumulate substantially and could cause a debt snowball. A budget can encourage you to conserve your money, and spend it more wisely.
Finding ways to save
Faced with income constraints and competing demands for money, many people simply spend what they must on necessities, saving whatever happens to be left over. You need to have a cushion to be financially secure. While experts recommend saving eight months’ salary to protect you from an emergency, most agree that paying off your credit cards takes precedence to avoid costly interest. By creating a budget, you will be able to control your money so that you contribute at least ten percent of each paycheck to savings.
The Wrong Path
Without an accurate depiction of what is coming into and going out of your wallet, you can easily rely on credit cards and loans to eat and pay your bills. Whether you’re working on a debt settlement plan, chipping away at your debt yourself, or working on a debt management scheme, your budget is often your guiding light. If you are prone to impulse spending, or tend to be an emotional shopper, practice buying only those items you need rather than want in the moment. One method is to delay your purchases for 24 hours. Often, an impulse will pass once you’ve had a chance to sleep on it. Debt management and spending behavior adjustments may brighten your financial outlook, so you can save more to reach your future goals.
Ignoring interest rates
When chipping away at your debt, many of us just look at the overall balances. But that’s not nearly as important as looking at how much you pay, every month, to hold that debt. For example, if you have $10,000 in student loans at 3% interest, you’re not going to pay nearly as much on that as if you have $5,000 at 20% interest on your credit cards. While both debts need to be paid off, longterm it’s the debt with the highest interest that will cost you the most money.
It would be nice if we could take immediate and drastic action when we realize our debt is a problem, but it’s rare that we’re in a situation where we’re the only one affected by our finances. The needs of children and other dependents, for example, can weigh surprisingly heavily on your budget if you don’t think ahead about paying for them. Be realistic in your budget, and leave a little flexibility to ensure that surprises don’t set you back.
The Internet is both a blessing and a curse for those of us working on debt management. Before Internet payments and online billing, you had to write a check for your payment and run it down to the mailbox immediately after getting your bill. Now, paying is simply a matter of clicking on a few pages… but it also means you have absolutely no excuse. You can’t argue the check’s in the mail when you’re sending the check via cyberspace. So, set up reminders, arrange automatic deductions, do what needs to be done, but don’t let a late fee get dumped on top of your pile of debt.
To secure your future, you must alter the present. By planning early, you can gain a better understanding of what challenges lie ahead and what options exist to guide you on the right path. Spend some time looking at your past as you work towards your debt free future. If you see yourself heading down this road of financial ruin, you may want to consider getting some help now, before your options disappear. The choice is in your hands.