Manage Debt Without Being Overwhelmed

A Closer Look At Debt Management

Most people these days have at least some debt. Student loans, credit card debt, mortgages, even those ten-dollar IOUs to your best friend can hang over your head. If it’s a small amount, then it doesn’t have much of an impact. You just tighten your belt and pay it off, but eventually everyone deals with debt management of some type in life.

“All of the problems we’re facing with debt are manmade problems. We created them. It’s called fantasy economics. Fantasy economics only works in a fantasy world. It doesn’t work in reality. “― Michele Bachmann

But what if you have large debt that doesn’t even seem payable in the next several decades? And what if you have more than one of these? It can clearly drive debt-managementsomeone into severe anxiety and cause more trouble than it’s worth. What to do? Like everything in life, the key is in management. Or rather, a debt management plan.

Debt managing all comes down to balance. If you take your income and set aside a piece for your debt, while still leaving some for food, rent and other amenities, you’ll be in the black. If you’re still in the red, then you need to look into more effective debt management strategies, which will be covered here.

Types of Debt

It’s time to start thinking differently about money and debt and start the healing process – and the process toward wealth and freedom.― Robert Kiyosaki

Firstly, let’s take a look at what types of debt there are and how best to (start to) pay it off.

Credit Card Debt

Ever since the credit card has been released, people have been abusing it. It’s just a lot easier to buy the things we want now, instead of having to take out loans. The problem with that is that a credit card is already like a loan, just with less paper work. Here are some things you can do to make that red in your balance go away:

Talk to your bank. You would be surprised at how much easier your life could get if you just complained to the right people. Yes, it takes time and energy to poke the right bears and there’s still a chance that you might not achieve anything, but usually, banks like keeping their customers (especially if they’re paying), so they’ll bend as much as possible to keep you. Or if not, there are no better people to get debt advice from than those who create it.

Use your credit cards. If you have a problem using up your credit cards, you might be tempted to cut them up and live off savings. Don’t! Using your credit card is actually beneficial, as long as you make your payments, of course. It’s much easier to come up with a payment plan rather than use cash only. After all, missed payments are the biggest thorn in your side.

Treat your credit card as a debit card. If you can’t make payments on your credit card, then it’s easiest to just see it as a limited card. If you hit 0 – no more spending.

Student Loan Debt

Most students today will have taken out student loans to graduate colleges and universities. With tens of thousands in debt, it’s easy for the toughest nut to feel overwhelmed, let alone someone who is just entering the job market and might even have trouble finding a job for a while. Thankfully, the interest rates aren’t too bad on student loans and the interest itself is tax-deductible, so you do have some breathing room. Here are ways to get rid of that student loan debt:

Think ahead. Calculate how much you need to start paying the debt off as soon as possible by as big payment as possible. Then, center your future prospects around that. Don’t go for the lowest paying jobs or internships, if you can help it, as they won’t decrease your debt, but will increase anxiety over it.

Pay off the loans with the biggest interest first. That way you won’t be overpaying by much.

Read up on your loan contract. There may be ways to lower your interest or increase the amount of time you have for repaying. Usually, those are income-based options. So, look up any information you can.

Work for non-profits. If you find a job that you love that is also non-profit, some or perhaps all, as long as you’re willing to stay for an extended period of time in that job, your debt will be forgiven.

Mortgage Debt

Mortgage debts are some of the largest anyone in the US can have. It is especially bad if your family keeps moving to a new place, taking out a new mortgage. That kind of debt can seriously kick you into the ground and have you make payments until you’re well into retirement. Here are some ways to prevent that:

Calculate payments before buying a new house. Calculate your monthly income and set aside a third of that for mortgage payments. That way, you have a fixed sum to get an idea of what you can afford, so you can shop around for affordable vs pretty, but expensive.

Think about a shorter mortgage. The longer the loan contract, the smaller the payments per month. That’s good, right? In a way. In the long run, you’ll end up paying much more for interest on a longer plan, whereas with a shorter one, you’ll struggle for a while, but it’ll be over sooner.

If you’re only going to stay at the house for a short time (e.g., a few years), think about getting an adjustable-rate mortgage. There are huge savings to be had here, but only if you’re at the property for a little while. Stay for more and you risk more.

Refinancing is always an option, albeit a painful one. If you’re 100 percent sure you can’t make your monthly payments and are drowning financially, think about refinancing. You’ll have to make payments for more than a few years than you signed up for, but in exchange, your monthly payments will be smaller, as will your interest. If ARM was for people who are only staying at a house for a few years, this option is for those who are in it for the long term. 

Remember the 20-percent rule. If you can’t put down 20-percent right off the bat on a house you want, it’s too expensive for you.

Car Loan Debt

debt-billsEveryone needs a car these days, whether to go to work, take your children to school, or even do the most basic of tasks, like go shopping. As cars get better and better every year, it’s tempting to buy a new one, if not for fuel-efficiency and energy savings, then for the looks or the peace of mind that it’s not a lemon. But, as the quality of cars goes up, so does the price. That’s why there are so many people who take out car loans, just to rack up debt later on. Here are some things to know before purchasing:

Car dealers want as much from you as possible. If you have a good (or even a reasonable) credit score, don’t fall into the dealership loan trap. It’s easy to fall for the advertisements of people getting loans for cars from the dealership, despite having horrible credit and being in the middle of a bankruptcy. That usually means that they’ll hide away a massive interest rating on cars that will barely run for a few years. If you can’t get a car without a loan, research your options. There may be better ways to take out a loan with smaller interests, and you don’t want to end upside down with your auto loan.

Pay off the debt as soon as possible. If your finances and other debts allow for it, set aside money every week to pay for the car loan. That way you’ll solve one of the biggest car loan problems – overpaying (sometimes even several times of the car’s worth).

Don’t buy a car that’s fresh off the belt. The newest models have the biggest drop in price in the first few years after release, so if you’re dying for a recent model, look something up that’s a few years older. That way, you’ll save money and be sure that your car can still stand the test of time.

General Strategies for Debt Management in the Long Run

“The speed of your success is limited only by your dedication and what you’re willing to sacrifice”― Nathan W. Morris

Make your payments on time. There’s nothing worse for your credit score and your wallet than payments that are late or not made. First, there are late fees, which can be just a few cents, but you’d be surprised how much they add up. Second, if you miss one or more payments, your interest can increase, along with your late fee.

Your credit score will also go down, making it harder to take out another loan later on. Not to mention the bank could inform collection agencies, who are not the politest and most understanding people around. It’s just easier to make payments as they come.

If you’re having trouble keeping track of your bills, there are plenty of applications online, some that even track your spending habits and/or have smartphone apps. If analogue is more your thing, use different colors on your calendar to mark which payments need to be made when. Also, never wait until next month to make a payment if you missed it by a day or two. Some bills try to scare you into paying on time by threatening collection agencies if you even miss a payment by a day, but it’s actually not the end of the world.

Consider an automatic payment plan. Too much stress and not enough time to go through every bill from a giant stack? Ask your bank about automatic payment plans. You can set a date that the bank automatically transfer money from your account to the payment of your choice. This works well on three fronts.

First, you’ll be 100 percent certain that you will never miss a payment, as long as there is money in the account. And second, if you are using your credit card as a debit card, automatically paid bills immediately leave you with the balance needed for food and other expenses, so you don’t need you to calculate as much. Finally, if you caught yourself trying to cheat by “borrowing” money from your debt payment fund for other activities, it will become much more difficult, simply because the bank will be in control of it. It’s an ingenious system and definitely one to take part of.

If you can’t make the whole payment, pay as much as you can. It’s possible to underestimate the amount of debt you’ll have and the size of monthly payments you’ll be getting. It’s also possible to have a bad month or two or even being laid off. Debts don’t care much for your life, so they’ll just keep accruing.

That doesn’t mean that you can just skip them, however. If you’re in a financial rut and still receiving payment notifications, do your best to pay at least some of the sum. That way, you won’t have that big of a leap the next month over, especially with the added late fees (and maybe even an increase in interest).

Prioritize. If you have more than one type of debt, make a list of all of them along with their interest rate and the length of the payment. Then, focus more funds to paying off the one with the biggest interest rates and the shortest length. Your number one priority is to get rid of the debt that is eating away most of your finances as soon as possible. Later on, you can pay more attention to the smaller loans.

Don’t sacrifice credit. If you have several accounts in separate banks, try to keep as many as you can in good standing. If you pay off all of your credit debts and remain with a horrible credit score, you’ll have dug yourself into a hole. But, if you keep at least a few accounts in good condition, you’ll still be relatively okay after you’ve paid off your debt.

Keep a budget plan. Depending on how big your debts are, it is crucial to stick to a budget. If you’re in huge debt, count every penny and put it to good use. If you have some breathing room, you can think about making bigger payments. But, you can’t do either until you’ve calculated where your paycheck goes. List how much you need for rent, debt payments, food, clothing, gas, etc. Then, see which areas you can shave off without sacrificing too much.

Seek debt counseling. Sometimes life throws a curveball and you get entangled in your debt contracts with confusing terms and conditions. Debt counseling can help with that. They will show you how to manage debt and help come up with debt management plans. It comes at a cost, but one that will be worth it.

The Nuclear Options

“I’m living so far beyond my income that we may almost be said to be living apart.”― E.E. Cummings

If you feel completely overwhelmed and you still need help with debt, there are three ways to wipe the slate clean, but they come at the biggest cost. Before takingA photo by Alejandro Escamilla.

Debt settlement. This is when you meet up with either the original loan giver or the collection agency to negotiate your debt. It becomes possible once you haven’t and can’t pay a dime for about 3 months. This option is like saying – “Look, there’s no way I can make payments. I have nothing of value and I earn pennies”. The debt collectors still want something, so they’ll be willing to take a part of the owed money rather than receive nothing. You can negotiate up to about half of the owed sum. Be prepared for your credit score to plummet, though.

Refinancing. This is only an option for people with a spotless credit rating. It essentially repays your old loan and takes out a new one. It’s usually used to lower the interest, but it’s still a very risky choice, as you’ll have to pay thousands in fees. Sometimes the pros outweigh the cons, sometimes not.

Bankruptcy. The last resort for most people. If you’ve gone through all of your options, perhaps even settling your debt or refinancing and still see absolutely no way out, bankruptcy will literally save your life. You’ll still have to pay some fees, like court and lawyer fees, to argue for why you should be relieved of debt, but they will obviously be lower than the debt you’ve accrued. Also, you will either have to give up any valuable personal belongings or let the bank take control of your funds in exchange for the debt relief. Furthermore, the fact that you’ve been bankrupt will stay in your credit report for 10 years.

Final Words

Debt is something that we all have to carry at least once in our lifetime, but you have to pay debt off the right way. As much as the idea of saving up for something we want sounds nice, sometimes it’s not that simple. Some manage debt just fine, while others struggle for years before caving and filing for bankruptcy.  One major key is to learn to budget.

But there’s never a hole big enough that you can’t get out of. As much stress as being in debt can cause, there is always a way out. There is no reason why managing debts should come at the expense of your well-being. With a little debt management planning and a lot of ingenuity, everyone can have a happy life with debt under control.

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