Having piles of debts can be too overwhelming and stressful. You may think now that your debts are too much to handle financially and you are feeling so trapped in it. But you know what? you can pay those debts off if you will know how to manage it properly.
Magic words…Debt Management. According to Cambridge dictionary, by definition, Debt Management is a method used to reduce or pay back debts.
If you want to get out of the debt trap , you must need to understand why debt management is very important. Here are 5 practical tips that can help you on your journey to debt freedom:
1. Know the difference between GOOD DEBT and BAD DEBT.
Debt. It could make you or break you. Actually, debt isn’t always a bad thing. Not until you get out of control borrowing or buying here and there without assessing your finances first.
There is such thing called GOOD DEBT and BAD DEBT. Let’s know the difference. According to Robert Kiyosaki of richdad.com, “Bad debt takes money OUT of your pocket, and Good debt puts money INTO your pocket.”
Here are some examples of GOOD DEBT:
- Business loan: If you are an entrepreneur, you can use the money to expand such as buying additional equipment and materials, hire people, and other recurring expenses needed to keep your business going.
- Education loan: Education is always an investment. It’s your set-back. Through this kind of loan, it will help you earn your degree, increase your chance to secure employment and ability to pay.
- Home and a car loan: Acquiring a home or car is considered as good debt if you will use them as investments. A house is a good asset that can be sold or can be rented out for passive income. While loaning a car, though it depreciates in time, can be considered as good debt if you will use it to provide comfort and convenience to reach your destination(eg. driving to work) or use it for business which can lead to income-generation.
- Credit Cards: Credit card is a good money tool as long you know how to use it and if you have good spending habits.
On the other hand, Debt is considered a bad one under these situations and more:
- Debts related to lifestyle “wants” like buying a new phone(when you have a working one), buying new clothes or shoes.
- Availing Payday loans and spend it on non-income generating activities.
- Availing any loan with very high interest rates.
- Credit card debts that you don’t pay in full.
2. Adjust your spending habits.
One way to get out of debt is adjust your spending habits. Record your expenses so you’ll know where your money is going. You’ll be surprised that you are paying for things that are “wants”- that just adds to your financial bleeding. It would be helpful to restrict yourself first on buying things that you don’t need and re-evaluate your budget. This way, you can free up funds and re-direct it in paying your debts.
If you are using a credit card, use it only to spend on something that you can afford paying in full when your statement comes. Do not overspend. Do not spend the money that you don’t have yet. if you don’t have the financial discipline, do not borrow money or buy using your credit at all. Not until you have paid all your debts fully first.
3. List loans based on interest rate and pay first those with highest interest rates.
Just like recording your expenses, it is imperative that you list down your loans based on interest rate. By the way, you might want to check out some customized planners from Viviamo Concepts that you can use to list and track down your loans.
Going back, Start from the highest one down to lowest. This type of method is called Debt Avalanche. This way, you’ll be able to prioritize which to pay off first. If possible and if you are able, double up your payments on debts that has the highest-interest rate. Once the debt with the highest interest rate is fully paid, pay the next highest interest-bearing debt that you have and so on.
If you still have cash reserve(savings), do not be afraid to use a portion of it to pay for those. This will be a big help in reducing the overall amount of interest you pay, therefore decreasing your overall debt amount faster.
4. Use the power of credit card to consolidate debts
Like I said earlier, a credit card is a good tool as long you know how to use it and you have the discipline and control over it.
Now you can use the power of your credit card in paying your debts as most of the banks offer “Balance Transfer”. This is one good strategy to pay if you have multiple credit card balances. You can combine them into one credit card with lower interest rate. Another good thing about this is that some credit cards also have promotional offer of 0% interest rate for a certain period of time.
Using just one credit card to pay for your other credit card debts is much easier to track, plus it has predictable monthly payment schedule so you will not miss any payment due date(set a reminder to your phone or laptop so you won’t forget).
5. Create or look for other ways to earn
Another way to pay off your debt fast is by increasing your income stream and finding other ways to save your money. More income means more means to pay, and more amount that you can cover on your debts.
How can you do this? There are many ways as follows:
- If you have a regular job, if possible, you may ask your boss for a raise or do some extra overtime work.
- Look for a new job with higher pay.
- A side-hustle is one good option. Get an extra job.
- Be an affiliate marketer.
- Sell items that you don’t need and do a garage sale or post it online.
- Liquidate your dividend stocks.
- If you have an extra room in your home have it rent out.
- Make money from your hobbies.
When in comes to debt management, remember this. Always assess your financial status. If you think you are not capable of paying debt, don’t get into it. Stop borrowing money. If a need arises that you need to borrow money or swipe your credit card, make sure that you borrow from a trusted provider to avoid getting scammed. Lastly, borrow only what you can afford to pay.
I hope these 5 tips will help you on your goals towards a debt-free life and financial freedom. You can do it!
