Debt management is a formal agreement that you and your debtor make to pay back funds that you have borrowed. Though payback programs, such as having a minimum monthly payment, can seem like a fair agreement to help you pay off your debt, your creditor is benefiting more from you owing them money over a longer period of time (remember they also have to earn money). You are also paying them interest that you could use to focus on other things if you pay off your debt quicker. Here’s 5 vital steps to help you manage debt immediately.
Step 1: Figure out how much you owe and who you owe money to.
Do you have student loans, credit card debt or personal loans from banks? Make a list of all the debt you have first. Do not be alarmed or ashamed in doing this exercise. Embrace the feeling of empowerment as you begin to manage your debt while gaining back a bit of financial freedom.
Step 2: Sort the amounts of debt you owe from smallest to largest.
Put the smallest at the top of the list. Most likely your largest debt will be your home. A technique referred to as the snowball method will be extremely helpful here. Start putting all of your extra money and efforts towards paying off the smallest bill while only making minimum payments on the rest. When you finish paying off the first debt continue down the list of debts you have pushing all of your extra money to pay off one bill at a time. Rigorous yet worth it.
Step 3: Create a monthly bill pay schedule.
This can be done through a fixed checking account that will automatically pay your monthly necessities. This can include your insurance, phone bill, and mortgage among others. This helps you not be tempted to use this money for other things but ensures that the bills you have monthly will be paid for without you having to worry about it.
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Step 4: Maximize an emergency fund.
Emergencies will always happen. The last thing you want holding you back from paying off debt is having to handle an emergency that may put you in even more debt. Having an emergency fund helps you have a piece of mind while conquering your debt. The amount needed in this account is based on your level of comfortability.
Step 5: Create a zero-based monthly budget that you will use to operate your household.
Essentially, you will create a budget that allocates every single penny that you make each month into a category. Every cent will be assigned to something. This allows you to know how much money you have to spend monthly on things like gas, groceries, savings, and outings. You can also assign a category such as debt management to allocate a specific amount of money each month towards your emergency fund, savings, and to pay off additional debt. Many people begin with tucking away ten percent of their monthly income for savings.
Bonus Tip: Instead of splurging when you receive extra money through a gift or from your tax return. Take ten percent and put it into your savings, then use the rest toward paying off your debt. Yes, every penny.
Managing your debt will most likely require you to make a few temporary lifestyle adjustments. You can pay off debt, especially credit card debt, much faster by pulling back from eating out and getting creative with outings that cost very little money. Resign from purchasing things that you may want but know that you do not need. Keep your expense list as thin as possible and watch the magic of your money erase away your debt much faster! Think of how accomplished you will feel to tackle your debt instead of your debt tackling you. Let the journey begin!