The 3 First Steps in Debt Management
The 3 First Steps in Debt Management
The 3 First Steps in Debt Management
Americans, in particular, have forgotten that easy credit isn't necessarily a good thing. When the housing market collapsed, many found themselves in more debt than they could handle, and as a result lost their homes, cars and much more. Debt management is an essential skill, and should be part of everyone's education. Still, it is never too late to learn how to handle your money and how to get out of debt if you are driven there by unexpected emergencies.
Figure out your Situation
Before you do anything else, you need to know exactly what your situation looks like. Make a list of all your debt. This includes mortgage, car loans, student loans, credit cards, bank loans, lines of credit, medical bills and any other bills you are paying off a month at a time.
The next step is to make a list of all your assets. This would be your savings accounts, retirement accounts, metals, jewelry of value, CDs, stocks, bonds and everything else that has an actual cash value. Leave off vehicles, collectibles and other paraphernalia that may or may not have value, since the market for these things is, at best, variable.
Finally, get a copy of your free credit reports from all three reporting agencies. You should do this annually in any case.
Establish a Household Budget
Sit down and figure out exactly what your household spends each year. Not what it would be if you cut out this or that, but what you spend now. If your utilities cost you $200 a month, then that adds up to be $2400 a year. Your food budget is $400 a month, then it adds up to $4800 a year. Include things such as your vehicle registrations, repairs, gas, clothes, haircuts, maintenance, yard expenses; everything you can possibly think of that you spend, put it down.
Now that you know what you need to maintain your lifestyle, you are much better equipped to figure out where you can cut back. Set a spending limit on each line item and stick to it. Many families are surprised at what they are spending on things such as dining out or entertainment. These are good areas for cutting expenses. Remember to support each other in sticking to the budget, it makes the process easier. Use a budget planner to help you stay on track.
Consider Debt Consolidation
Debt consolidation is a great tool, if used properly. The goal behind debt consolidation is to combine all your lines of debt into one so you can pay it off more quickly and efficiently.
Part of the reason this works is that if you owe $10,000 in credit card debt and are paying 25-28% interest per card, it will take you much longer to pay it off than if you consolidated all of it into one payment with an interest rate of 10-15%. You will save a lot of money on your interest; and, generally, the single payment is much less than all those minimum payments were individually. It also looks better on your credit report to only have one line of debt than several.
Debt management is an important skill because at some point or another most people have some level of debt. Whether it is the several thousand you owe a hospital for emergency treatment, the car you bought that was a bit beyond your means or the unexpected debt that accumulates when someone loses a job, debt happens. Dealing with the situation calmly and rationally will see you through your crisis and on to better days.
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