Reducing Debt
Being in debt is a financial state shared by tens of millions of people across the world. Many consumers think of debt as being behind with payments, but while that is a debt problem, it is not the full debt definition. If you owe money, even if your payments are up to date and you have an AAA credit rating, you are in debt; you have a liability to whoever you borrowed money from. Just as a business has assets and liabilities, so do you as a consumer and individual.Your liabilities are your debts: loans, mortgages, credit cards, and department store cards are debts if you have a negative balance on your account.
When it comes to an individual pleading for help to get out of debt, then we are normally talking of those consumers, who number in the millions, who have a serious debt problems, and are behind with their payments.
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What is the Best Way to Get Out of Debt ?
As with all consumer finance matters, it will be dependent on personal circumstances, but there are a few basic principles that it are worth following. If your debt position is bad, it is not going to go away overnight; there is no legal way to make all your debts suddenly disappear, unless your creditors all have a fit of generosity and say "let us forgive and forget", write them all off, and expunge you from their records. That does not happen.
Here are the few basic principles to apply in trying to get out of debt:
Know Your Monthly Outgoings
Just knowing what your debts are is not much help in isolation, except that it will bring home to you in a stark way the reality and scale of the problem. What can be even more stark is when you compare your debts and other monthly outgoings with your income. To do that, you then need to list out all your monthly outgoings.
Set Out a Monthly Budget
Once you have all your outgoings listed, it is easy to set a monthly budget. Just add your income and you have a picture of the current monthly situation. You can then think about your plan for the next 12 months, and start to put together a budget for the next year as you apply any changes you implement to bring your debts down.
Know Your Debt Position
As with any sort of problem, you need to know exactly what it is and where you stand. It is therefore essential to get together all of your statements from banks, credit card companies, and lenders, and list out each debt, including the monthly repayment. It is worth noting, while you are about it, interest rates, amount overdue, and any other relevant matters such as penalties for being overdue or paying off the debt early.
Prioritise Your Debts For Repayment
If you have multiple debts, they will not all be created equal. It is worth prioritising the debts in a way that will improve your situation the quickest, and it is probably best to pay off the most expensive debts first. Department store cards and other credit cards may well be the most expensive, so aim to pick them off one at a time. It can be a good idea to pay off the smallest of that expensive group first, just for the satisfaction of clearing one debt. Having proved to yourself that you can get out of debt in that case, you can move on to the next. However, always bear in mind that you must keep up with the repayments on all your loans each month, if you are to ever get out of debt.
Critically Examine Your Outgoings
We all have a habit sometimes of spending a lot on things we do not really need. If you want to reduce your debt, you need to release money somehow by making savings on items of your monthly expenditure. That will be easier once you know what level of savings you need to meet your monthly debt repayments. Once it is all written down on paper, or typed on a computer, your true situation will be there in black and white, and that can be quite an inspiration to get something done.
Change Your Attitude Towards Borrowing
Debt problems are a modern social disease. It is actually possible to live better without borrowing, but it requires tenacity and the ability to be different to everyone else around you. By succeeding in paying off one or two of your debts quickly, you will give yourself the strength to eliminate your debt problems and ultimately lead a debt free life, with the probable exception of a house, for which cash payments are usually not feasible.
Discuss the Budget With Your Partner
Debt problems can damage relationships, but the risk of that can be minimised if you discuss the budget, and then monitor it, withyour partner. You will both be affected, so together you may be more inclined to make the necessary sacrifices and overcome your debt problems.
Borrowing Reduces Your Financial Assets
In business, a company may borrow money at 10% and use it for a capital investment that will bring in a 20% return. That company is still building its assets despite borrowing. For a consumer, though, any interest paid to lenders is money down the drain. Interest on loans steadily depletes your assets, and you become poorer. The only exception is your home, that is if the capital growth of its value exceeds the mortgage interest.
It is always worth remembering those facts, and try to develop a saving habit which will mean those same lenders (ie the banks) will pay you to look after your money, albeit it at a pitiful rate of interest compared to loan interest.
All the above takes time, so getting out of debt fast with debt consolidation is rarely a possibility.
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