How to manage your debt - Making the most of what you have
Nearly everyone has debt. Not everyone has a plan on how to get out of debt. Even people with only a small bit of debt will be happier when it's paid off. Let's look at how to accomplish that in a fast, and relatively painless way.
How much debt do you have?
This has to be your first step. When you know how much debt you have, you know if you need professional help, and what you have to do to pay your debt off. To add up your debt get all of your bills out, and add up how much you owe on your credit cards, bank loans, car loans, line of credits, mortgage, student loans, and any other debts you can think of. Write up a list of each debt including what it is, and how much is owed. Keep the list around, you will need it later on.
What are the minimum payments?
On that list, write down beside each debt how much you need to pay on that debt each month to keep your creditors from knocking on your door. At this point, do not worry about how fast it will be paid off - you just want to pay enough each month to keep your knees working. Now add up all those minimum payments, and you will have the minimum payment on your total debt each month. If you pay less than this, you get into trouble. If this number looks really big to you, it is likely time for you to go get professional help from a debt consolidation expert.
How much income do you have?
This will hopefully be easier and more fun than the debt side. On another sheet of paper, List all your sources of income for the month. This could be a day job, a part time job, money from parents, money from a renter, money from writing articles for Helium, or anything else that is a steady source of income month after month. Now add them up to get your total monthly income.
How bad is it?
At this point we can start to get an idea of your debt situation. A good rule of thumb is that your debt payments should not exceed 30% of your income. This number leaves money for you to pay rent, food, utilities, and so on. To find out your debt servicing ratio (that number we just talked about) divide your total minimum monthly debt payments into your monthly income, and multiply by 100 to get a percentage. If this number is more than 40%, you should talk to a professional for financial help. If its 30-40%, you need to save your pennies and pay down your debt fast to get it under 30%- and no more adding to your debt until then! If it is under 30%, then you are in pretty good shape. If you are worried at this point, you should go see a debt consolidation expert to get professional help and discover all your options.
Whats the next step?
Now you know how much total debt you have, your total minimum monthly payments, and how much income you earn each month. That is a lot of information! Even stopping here you would be better off than most people who have debt. But if you want to get ahead of your debt you need a plan.
Making a plan
The next step is to get a plan and stick with it. The plan is to pay down your debt fast. The most important thing is to not put anything new on your debts that you have to pay off; if you must do this, pay it off that month to avoid extra interest charges.
To pay down your debts fast, you need to cut your living expenses back, free up that money, and put it towards your debts.This is extra money each month that you never had available before and it will really shrink your debts fast!
Pay off the highest interest debts first. That will free up the money you were paying in interest on that debt, to go towards paying down the rest of your debts even faster. This method is called snowballing because the more you pay off, the faster you pay the rest off. Even an extra $10 a month makes a difference. And with snowballing its $10 a month, then $20 a month, $30 and so on as you pay off more debts.
A thing of the past
The happiest days of your life will be when you pay off the last of your debts. With all your debts gone, you will have full control over your money instead of owing someone part of your paycheck each month. Now go and enjoy that feeling, but stay debt free or you will have to do this all over again!