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Managing Personal Debt

Money could be one of the greatest obstacles in life, just ask those who are living their life in debt. No matter when or how you accrued debt, the problems only get bigger with time. Let’s dive deep into the debt problem and find ways in which your money can be managed more wisely.

Why debt?

Living costs are rising by the day, and the medical expenses are piling up your desk. Then there are utility payments, food payments, groceries, gas and more. Don’t forget that surprise office party you need to contribute to or the wedding of your close friend where you will be expected to dress up and bring a good gift. The list goes on and on. With a paycheck that doesn’t offer much flexibility, these ballooning payments are difficult to endure. Eventually, people start taking debt, and within no time, their debt is also piling up along with their usual payments, creating the most striking double whammy of troubles.

Is debt even necessary?

It could be. It is not always wise to expect people to have enough allocated from their budget for every emergency and unseen expense. Sometimes, people make mistakes, and some other times, they may simply not have enough to manage all their expenses. The question is not really ‘if the debt is necessary’ but ‘how to handle it more effectively.’

Stop panicking and calm down

If you already have too many debt payments coming up and feel that there is nothing you can do about it, take a deep breath and calm down first. Decisions taken while you are stressed are always bad decisions.

Now, write down all the sources of your income on a paper. Anything that could come in monthly, no matter how big or small should be written. On a second paper, write down all the payments and expenses you make during a month. On the third sheet of paper, write down all your debt payments. It would be worthwhile to note the total amount payable to the creditor as well as the monthly payments for the same.

Though you can do this exercise using a spreadsheet as well, writing it down is physically more tiring and helps you feel more in tune with your payments (personally verified method).

Now, check the minimum payments you have to make on each on the loans you owe and write them down as well. This will help you get a complete picture of your finances

Paying it all back

There are two tested and tried methods of paying back the debt that could help you in living stress-free in the next few months. The first method allows you to make minimum payments on all your debts each month. However, your goal is to pay in full the smallest debt first.

Let’s assume you have three loans of $200, $2,000 and $20,000. In this ‘debt snowball’ method, you will make the minimum payments on each of the loans which are $20, $200 and $2,000. Now, you want to save some money and ensure that you pay off more than the minimum balance for the smallest loan of $200. In the first month, after making a minimum payment of $20, you can forego one trip to the salon and add $50 to the loan payment. This method will helps you reduce debt one by one, but more quickly. Once the smallest debt is paid off, move on the second debt and so on.

The second method is called ‘debt avalanche.’ In this method, you will focus on the debt with the highest rate of interest first, regardless of the amount to be repaid. In our example, the $2,000 debt could have the highest rate of interest, followed by the $200 debt and the $20,000 debt. This means that you should get first pay off the $2,000 debt and get rid of high interest rates. Once done, find the debt with the next highest interest rate and so on.

The debt avalanche method asks for more discipline. Debt snowball method, on the other hand, lets you enjoy small victories more quickly at the beginning of your debt repayment journey. This could be a psychological boost for people.

Your debt payback plan could start today, depending on the method that you feel comfortable with. So get started today.

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