Effective debt management is an important part of a smart financial wellness program. One needs to have a handle over debt to avoid it snowballing and getting out of control. To borrow the words of Warren Buffet, “It is not debt per se that overwhelms an individual, corporation or country. Rather it is the continuous increase in debt in relation to income that causes trouble”. Financial gurus often advocate that the wise management of debt is often the first step to gaining control over ones finances.
An effective financial plan will always be focused towards reducing debts and increasing investments. However, certain debts often serve as investment plans for the future.
A debt which has the potential to increase our net worth and has future value is termed as “Good debt.” Mortgages, educational and investment loans often come under this category as these are investments for the future. Alternately a “Bad Debt” is one that does not add any value to our net worth. It either leaves us with nothing to show for it, or the items will get consumed or depreciated leading to loss of value.
Target the Bad Debts first:
A good financial plan will target the Bad debt and seek to eliminate it first. This is because Bad Debts cost us dearly over an extended time period, without presenting any clear benefits. These debts would include Credit card payments, personal loans, medical loans etc.. which usually have higher interest rates. It always makes sense to first target those loans with higher interest rates for repayment, when it comes to setting up a repayment plan. The debt that costs us the most money should be the one that should be targeted for clearance first.
Consider Refinancing options:
Financial institutions offer a multitude of refinancing options on loans. If repayment is an issue, and you are not able to balance the expenses, it always makes sense to conduct a simple market research to identify loan providers who offer loans at lower interest rate. At times, opting to refinance a purchase with a bank offering lower interest rate, or transferring the debt from a high interest source to a lower interest source, could often save you from making higher payments that you cannot afford. While refinancing home or student loan may not lead to quicker repayments, there is a good chance that it will make life easier by making monthly expenses manageable.
Calculate and Rank Debts in order of priority:
Paying off high-interest debt before the low-interest debt, will help save money in the long term. However, paying off a loan with a higher interest rate initially may not always be the best option. You might wish to try concentrating your efforts on debts with lesser sums. This serves two purposes: one, it frees up money to apply to other bills, and second, it feels good to pay off an account. Don’t underestimate the mental lift you might get from paying off a few of your lesser obligations before tackling the major ones.
While the first option would reduce the total amount you need to pay off, the second one would reduce the number of creditors that you would need to deal with.
Consult a Debt Consultant if required:
Debt consultants specialize in advising people on how to achieve debt relief. They help in developing viable plans for managing debts and paying off loans. They help us to achieve effective financial solutions.
Sometimes it might not be easy for us to create a plan and stick to a budget necessary for dealing with debt. In these instances, it always makes sense to contact professionals for assistance.
Becoming Debt free is about more than just paying off debt. It is about discovering Freedom, Flexibility and Control over your life, your finances and your future.
www.smartmoneyeducation.com will give you a new outlook on managing your money better.