A debt is the amount of money you borrow from a creditor. Money can be borrowed in the form of cash, an item, or cash equivalent. Generally, you borrow when you can’t afford to pay for something in cash. A debt arrangement gives you, the borrower, permission to borrow money now under the condition that you pay it back later, usually with interest and other fees. If you happen to be in debt, then you understand this all too well.
Having debt in and of itself is not a problem. After all, there is good and bad debt. Good debt is debt that you can handle and is usually associated with some form of asset, for example a home or some other form of appreciable or income-generating property or asset. Student loans are also considered good debt; after all, they afforded you a college education and typically have very low interest. Bad debt would be any debt you can’t handle, and it is usually associated with revolving accounts such as credit cards. It has no appreciation or income earning potential.
If you do have bad debt and you are struggling to make ends meet, most likely you have experienced some or all of the following:
- Your bills often include late fees.
- You bounce checks.
- New bills arrive before old ones have been paid.
- You tend to avoid opening bills when they arrive in the mail.
- Your checking account is frequently overdrawn.
If any of the indicators above sound familiar, it’s likely that you have a problem with debt. The good news is there is a way out. Here are some things you can do to help dig your way out of debt.
Determine How Much You Owe
The first step to getting your debt under control is to identify how much money you actually owe. This is a very easy, but necessary step. Simply write down the names of all of the debts you have. This list will likely include mortgage, credit cards, auto loans, medical bills, and other miscellaneous debt. Here is what you want to know about each:
- Who is the lender?
- How much do you owe?
- What are the interest rates, terms and conditions?
Now that you know what you owe, simply total everything up. This may not seem like a big deal, but it’s actually a huge step in acknowledging what you owe.
()
Set a Realistic Budget
The next step is to develop a simple budget by determining your total monthly income and the total monthly outgo. Your outgo should include your minimum payment for all debt and other mandatory living expenses, such as food and utilities. Determine if you have a budget surplus (money left over after all monthly expenses are paid) or deficit (not enough money to meet all monthly expenses). If you have a budget surplus, continue to the next section. If you have a budget deficit, skip down to the “What to Do If You Are In Trouble” section.
Plan Your Payoff Strategy and Execute
Once you have determined if you have a budget surplus, you will need to develop a debt payoff plan. As you begin to develop your plan, keep in mind that long-term installment loans such as mortgage balances, student loans, and even car notes should be placed at the bottom of the list, as each have a fixed payoff date. The initial focus of your debt payoff plan should be high interest rate credit cards and other high interest debt.
If you have multiple credit cards, identify the order in which you will pay them off. There are two philosophies on this. Some financial planners recommend you pay off the credit card with the highest interest rate first. However, other financial planners recommend you pay off the cards with the lowest balance first. This way, you feel like you are making progress, as you recognize that one card has been paid in full. Of course, the choice is up to. If you have $100 extra dollars monthly, then you have $1,200 that is dedicated to paying down your annual debt. Once you pay off one debt, start with the next one. If you come across extra money, try to add that toward paying down your debt too.
Stick with the plan. Paying off your debt takes time and patience. You can easily become discouraged if you feel the process is taking too long. Just keep in mind that you have a plan and eventually you will pay it off. It may take from one to five years or more, depending on your debt level. However, never be discouraged by time. Simply keep your eyes on your target goal of debt freedom.