For today’s consumers, having a certain amount of debt is commonplace and does not necessarily need to be considered bad. Only when debt is not appropriately managed can it become a substantial problem for the debtor in question. With these thoughts in mind, the following information has been put together to provide you with insight into the debt management topic and the importance of putting together a sound debt management plan.
What Is Meant By the Term Debt Management Plan?
Debt management plans, often referred to as programs, refer to strategic efforts focused on helping consumers take control of debts that have begun to become overwhelming. These plans can often reduce the amount of payments you have to make monthly. Their overall purpose is to lower your debt gradually so you can get back on track to achieving your current financial goals.
The types of debt management plans range from do-it-yourself models where you organize/plan out your various expenses and how they will be paid to plans where you utilize the assistance of credit counselors. The positives of a good debt management plan may include reduced interest rates and consolidated payments. You can also benefit from better peace of mind. This comes from knowing you have a plan in place.
Know the Total Amount of Debt You Can Afford
One of the most important points you must be aware of related to the debt management topic is understanding how much overall debt you can afford to repay. To put it simply, it is not possible to effectively manage an amount of debt that is beyond what you are capable of paying back promptly. It is a good idea to determine your debt-to-income ratio by taking your minimum debt payments per month and dividing it by your monthly income pre-tax. This will give you a good idea of the amount of debt you are currently able to manage effectively.
Good Debt and Bad Debt – Understanding the Difference
Though debt is generally seen as a negative term, the reality is there are both good and bad forms of it. When we use the term good debt, we are speaking of low-interest debts that can help you to increase your net worth or your overall income. Bad debt refers to debt that you owe with high interest that has been taken out to acquire depreciating assets. Acquiring more debt than you can afford to pay back always falls into the bad category.
Be Careful With Your Credit Card Usage
There are many benefits to using credit cards. They offer a convenient way to make purchases and can help you to build a strong credit score. With that said, they are not a great overall way to borrow funds as they have high interest rates when their balances are not paid off quickly. With that in mind, it is a good idea for those concerned with debt management to only purchase with credit cards what can be paid back that month. You should also keep your monthly charges to 20% or less of the maximum limit for the card in question.
3 Tips to Achieve Your Debt Management Goals
The following tips are crucial to achieving your debt management goals. They include:
Use Proven Money Management Strategies
Money management and debt management go hand-in-hand with one another. If you are dealing with debts that are starting to feel overwhelming, making a few changes to your monthly expenditures might make all the difference. This could include selling certain assets. It also involves figuring out which monthly expenditures you have that can be done away with. Another way to practice debt management through money management is by raising a lump sum of funds that you can use to try to negotiate a reduced settlement with your creditors.
Utilize Voluntary and Formal Arrangements
There are both voluntary and formal arrangements you can make that will help you achieve your debt management goals this year. The voluntary approach involves reaching out to your credits to negotiate a way to pay back the debts you currently have. You might suggest the stress reduction approach. This involves tackling the debt that is causing you the most stress first. Another option is the snowball approach where you pay off your smallest debts first and then start dealing with the bigger ones. If you find yourself in a situation where you do not have enough money to pay your current debts by their due dates, it might be necessary to make formal arrangements with your creditors. This often involves legally binding agreements that are approved through a court.
Additional Borrowing Options for Debt Management
There are a few other possibilities you can consider to help you achieve your debt management goals. They include taking out additional loans to help you cover existing debt. A consolidation loan is a popular approach for those with multiple debts they are struggling to repay. When you consolidate, it means you only have one bill to pay instead of multiple ones. This can help to greatly reduce stress. Another option is an equity-release mortgage. This is an option recommended for those who are over 55 years of age and do not have a current mortgage. The truth is that these loans are not for everyone and so you should seek out legal advice if you are considering this as an option to help you with your debt management needs.
Final Thoughts Regarding Debt Management
Having debt you must address can feel like a daunting task but addressing the issue with the points we highlighted above in mind can help you to achieve your goal of successfully managing it. With the right approach, you can get yourself back on track and start to move forward on achieving the financial goals that you have set for yourself.