7 Tips To Manage Your Debt

When it comes to debt most people understand that it should be avoided whenever possible. Ideally we would pay cash for all purchases big and small, however that’s a pipe dream for most Americans. In a world where living keeping up with the Jones’ is the order of the day, it becomes more and more difficult for many people to avoid debt.  That’s unfortunate, but I’m not going to sit here and preach the debt-free gospel:  that’s Dave Ramsey’s job.   It’s too late for that:  you’re in debt.  What’s important now is to manage your debt and avoid letting it get out of control. The following tips can help you avoid letting your debt spiral out of control.

1. Understand how debt affects your finances - It would seem obvious how debt can impact your overall financial health, however many consumers simply do not “get” how debt works. It is not enough to know how much you earn and how much you can afford in payments per month. You must look at the big picture to ensure you are not carrying unnecessary high interest debt into your golden years.
2. Control you spending – The single easiest way to control your debt and avoid getting in too deep is to control your spending. We can thank the recession for opening the eyes of millions of people, helping them finally see how living beyond your means can lead to financial ruin. By cutting back on unnecessary expenses you can add to your savings versus money owed.
3. Pay more than the minimum payment – Many people get over their head in credit card debt because they assume if they can afford the minimum payment they can afford to spend the money. This is the farthest thing from the truth. By making only the minimum payment you barely touch the principal balance and end up spending years paying interest.
4. Get rid of high interest debt – If you are already showing signs of too much debt you must begin attacking high interest balances to regain control. By paying as much as possible on high interest accounts you can pay them down quickly. Avoid using credit cards with higher interest rates once you have paid the account off but do not close the account as it will have a negative impact on your credit. You could potentially save thousands of dollars in interest payments by eliminating high interest debt.  Some gurus, such as Dave Ramsey, disagree.  Ramsey followers feel there is more of a psychological benefit to paying off small debts first, hence the debt snowball you may have heard about.
5. Build an emergency savings account – Don’t forget about saving money for unexpected expenses. This doesn’t help your current debt situation, however it will enable you to avoid incurring more debt should you find yourself in need of immediate cash.  I personally feel comfortable keeping 12 months worth of expenses in my ING Direct savings account (I recently switched from a Vanguard money market fund).
6. Use caution when borrowing – Debt consolidation loans are often recommended to consolidate and pay off debt. Unfortunately many people take this road only to find themselves still struggling to make ends meet and to make matters worse, they likely put up their home or other assets to secure the loan. Payday loans are another debt trap where you could potentially end up owing more than you can pay back, creating a cycle of debt.  You can consolidate credit cards to facilitate quicker and easier debt repayment, but it’s important not to use this as an excuse to go out and borrow more money.
7. Ask for help – If you have taken every action available to manage and control your debt and still find yourself behind, consider talking to your creditors or even getting professional help to get your finances back in order.

By paying close attention to your debt and keeping it under control you are in a better position to reach short and long term financial goals.