Do you owe a lot of money to lenders? If yes, you should do something about reducing your debt right away and don’t delay. The first thing you must do for controlling debt is getting a budget ready for your day to day life. This will help you in finding out where exactly all your money is going; you will also be able to spot the areas where you can control expenses. Read on to find out what else you can do for effective debt management.
- Set your budget
You should begin by finding out the total amount of money you owe to lenders. Get statements from all of your credit cards and all the other kinds of loans you have yet to repay. This will allow you to have a clear idea about the interest rates various loans are charging. Those statements would also feature your outstanding balances. Checking out these statements will provide you with a detailed understanding of the amount you owe and make getting a budget ready much easier for you.
Here are some more tips you should follow when setting your budget:
- Find out your after-tax earnings.
- Breakdown your monthly expenditures and analyze each area carefully.
- Once you identify the unnecessary expenses, try your best to cut them out.
- Stay away from impulse purchases.
Following the above tips will help you in determining how much money you actually need per month for running a normal life. In addition, you will also be able to save a significant amount to pay back your debt. If there’s a shortfall, you should go back to the calculations and try to reduce expenses as much as you can.
- Begin with the debt with the highest interest
Experts usually recommend that you manage debt starting with the loans that charge the maximum interest. Usually, credit card debts fall into that bracket. The interest charged by credit card providers is often huge (can be as high as 29%). You might need years to pay back such debts if you keep paying the minimum amount due.
For instance, your credit card balance is $1,000 and you are just paying the minimum amount every month; in such a situation, you will need around ten years for paying back the entire money you owe to the card provider. What’s even more alarming is that adopting the above method would require you to pay way more than $1,000 just as interest over that same 10 year period. Thus, it would be a good idea if you avoid repaying the debt using that method.
- Start with your biggest debt
Next, you will have to check the biggest debt you need to pay back. For the majority of us, it’s our mortgage. It’s true that the experience of owning a property is absolutely exciting. However, such excitement often brings in a big burden called a “mortgage”. We would advise you to treat mortgage repayment as a regular monthly expense instead of dealing with it like a huge debt that you would like to get rid of as quickly as possible. Here are some useful ways of reducing mortgage debt:
- Don’t forget to compare the mortgage rates offered by various financial institutions before purchasing or refinancing
- If you earn a hefty sum every month, opt for accelerated payments
- Ask your lender about prepayment options and utilize it for your own benefit
Consider debt consolidation
The term “debt consolidation” is used for the act of combining multiple debt obligations into a fresh loan governed by favorable terms like a lower interest rate, bigger tenure, and so on. Debt consolidation involves utilization of the amount obtained through a new loan for paying other debts back.
By opting for debt consolidation, you may be able to save significantly on interest and finance costs of various smaller loans owed by you. What’s more, instead of making numerous payments to your creditors, you will only need to make a single payment. For making the process easier, you can consult websites like DebtConsolidationLoans.com.
Here, it must be noted that a debt consolidation is an option for you only if you are looking to manage debts that are not linked to an asset. Examples of such loans include personal loan, education loan, money owed on your credit card, etc. You cannot use this method for paying back a mortgage.