Debt management is the process of getting your debts under control. It involves monitoring your debts, acknowledging their full extent, and establishing a plan to make your payments on time and in full. If you follow your plan accordingly, you can rise above even the most crippling of debts.
Bear in mind that debt management does not mean immediately resolving your debts. It means slowly chipping away at the total to increase your chances of becoming debt-free.
What’s the Benefit of Debt Management?
Aside from getting a handle on your finances, debt management plans can offer many other benefits. Here are some advantages worth considering:
- Simple payment processes. If you use debt consolidation (see the fourth principle of debt management below), you can satisfy all of your minimum monthly charges with a single payment. This is much easier to manage than trying to remember all the creditors you owe.
- Less monthly time commitment. Making a debt management plan helps you automatically set up a monthly payment strategy. No longer will you have to waste time laying out your monthly debts every month—you’ll just know what your debts are and how much you need to pay that month.
- Fewer interest rate charges. Consolidating your debts to a single payment reduces the amount of interest rate charges you face every month. This helps you stay on top of what you owe—nothing more.
What Are the 5 Principles of Debt Management?
So, how do you start managing your debts? Before you can make your plan, you must understand some basics.
Here are 5 principles of debt management, which you can use as your guiding light towards a better-balanced bank account.
1. Understand Your Debt
The first principle of debt management is to Know what you owe—you’ll only be able to move past your debts if you have a clear understanding of the weight of your debts.
As a first step, you need to make a note of every creditor you currently owe. This means accounting for every credit card, loan, and any other kind of debt you make payments toward. Once you have everything tracked, you can then look into the severity of your debts.
The best way to get a grip on the weight of your current debt is by calculating your debt-to-income ratio.
To do this, you’ll need two totals: your total monthly debt payments and your total monthly income. Divide your monthly payments by your monthly income to get your ratio.
If your ratio is above 20%, then you know it’s time to begin the debt management process.
2. Know How to Budget
There are several different ways you can budget your income. Instead of spending time going over the pros and cons of each budgeting strategy, it would be better to go over some budgeting basics that can be applied to whatever strategy you may choose.
Consider these five tips:
- Set clear goals. Setting goals is a key principle of debt management. An end goal helps motivate you to save and budget properly. You may budget to save up for a new home or car. But if you’re reading this, your goal should simply be to reduce or eliminate your debts.
- Assess your income. Do you have a fixed salary? Or is your monthly income variable depending on how many hours you work in a week? Whatever the case, get a rough estimate of your monthly earnings, so you know what you’re working with.
- Control your spending habits. You may need to distinguish between wants and needs. For example, eating out is fine, but cooking at home can help reduce what you spend on food every month.
- Manage credit card usage. If you’re tempted to put something on your credit card, reconsider the purchase. You may even choose to leave your credit card at home, so you don’t have the temptation.
- Automate savings. Put a set amount or percentage of your monthly earnings into a savings account every month. Or, in the case of eliminating debts, have a set dollar amount you can commit to each month to pay off your debts.
3. Pay Off High-Interest Rates
Debts with high-interest rates can be incredibly difficult to surmount because the interest rates increase with every month you haven’t paid it off. So, if you’re just trying to pay the minimum amount, most of your payment is just going towards the interest payment and not your actual debt.
As such, you need to tackle these high-interest debts first. While you should still pay the minimum monthly charge for your low-interest debts, you should put more money towards high-interest rates so you can make a dent on the outstanding balance.
Asking for Lower Interest Rates
Some creditors are willing to lower your interest rates if you’ve been good about making your minimum monthly payments on time. So, consider reaching out to them to see what they are willing to offer. You have nothing to lose by asking.
4. Use Debt Consolidation Programs
Debt consolidation is the process of paying off all your debts and loans with another third-party loan or line of credit. Then, instead of paying multiple lenders every month, your payments are consolidated to a single payment and a single creditor.
There are a few options for debt consolidation:
- Balance transfer credit cards. These credit cards let you transfer all of your debts and incur 0% interest during an initial promotional period. Then you can pay off all of your loans as if they were a single credit card monthly payment.
- Debt consolidation loan. This type of loan effectively pays off your current debts, with the expectation that you will pay all of it off in full to your new creditor.
- Home equity loan: If you own a house, you can put up your home as collateral. While this can offer lower interest rates, it does open the risk of foreclosure if you miss payments.
- 401(k) loan: Some employers allow people to borrow from their retirement savings. This should be a last resort since pulling money from your retirement account can damage your larger life savings plan.
Your ability to use each type of consolidation loan depends on your current credit score and the size of the debt. For example, balance transfer cards are usually only available to people with good credit scores.
5. Ask for Help
When all else fails, and your debts still seem insurmountable, it’s time to ask for help. There’s no shame in this, but it will make you feel incredibly vulnerable.
You may also not even know how to ask for help in the first place. Here are a few places you can go to:
- Friends and family. This option is dicey, as many friendships and family ties have been severed over money. You can ask for a loan, But you can also ask for help in other ways. Maybe they have odd jobs they could pay you for, or maybe they have a spare room you could use to cut back on rental costs.
- Crowdfunding. Starting a Gofundme or other kind of online crowdfunding lets you ask for help from anyone. Simply state why you need money (be honest), and set a realistic goal. Don’t anticipate the crowdfund to pay off all of your debt—that would be asking too much. Instead, decide on an amount that would satisfy your immediate needs.
Start Managing Your Debts Today
Hopefully, you now have a better idea of how you can manage your debts and, someday, become entirely debt-free.
In the meantime, if you need more help managing your debts or are looking for a way to get an easy small loan, we hope Power Finance Texas can help. Check out our homepage to learn more about what we can do to alleviate your financial concerns.