Debt management requires a realistic personal budget and
some old-fashioned self-discipline. With a little planning,
both are within your grasp.
The Debt Cycle
In most instances debt tends to creep up gradually. An adult
entering the work world obtains a credit card or two, just
for emergencies and perhaps for gas. And when the bills
come in, they decide to make only the minimum payments because
there are other things to do with the paycheck.
After all, life is to be enjoyed, and leisure activities
cost money, regardless of your personal budget. After several
months, another offer for a new credit card comes in and
the teaser interest rate is appealing, so now the individual
can purchase that apartment furniture and the new television.
Two years and several credit cards later, the debt is mounting
and the payments are becoming more burdensome. Now there
is no money left for fun after paying only the minimum payments.
The consumer is looking at years of paying off debt on things
that have a “shelf life” that is ticking away.
If an emergency should occur – a major car repair or a medical/dental
expense – it will have to be charged because there is no
cash reserve. Eventually, the credit cards are at their
high limit, and a payment or two has been late or missed.
The credit score is now affected negatively, so any major
purchase will come with a higher interest rate. Had this
individual learned and practiced the basics of creating
a personal budget for debt management, this could have been
avoided.
Debt Management and Prevention
Debt management requires self-discipline and a personal
budget. Prevention of debt in the first place requires exactly
the same thing. Statistics show that people who do not have
budgets are far more likely to accumulate dangerously high
“bad” debt that will keep them chained to monthly payments
for life.
This situation creates lack of freedom, stress, anxiety,
depression, family strife, and a number of related physical
ailments. Life becomes drudgery. All of this can be turned
around with the development of and commitment to a realistic
budget. The process of budgeting is not that difficult and
involves the following steps:
- Add up the total household monthly net income. This
is the figure you will be working with as you prioritize
and plan for debt payoff.
- Make a list of each of your expenditures for an
entire month. This includes even the tiniest purchase.
You have to see where your money goes and plan your
debt management.
- Divide expenditures into columns of “absolute necessities,”
“not necessary but important,” “unnecessary,” and “non-monthly.”
The non-monthly bills are those that you pay every 2,
3, or 4 months – perhaps a water bill or a car insurance
bill.
- Add up the “necessary” column. Divide the “non-monthly”
by the number of months you have in between payments
and add that figure into the “necessary” column.
- Subtract the total from the “necessary” column from
you total net monthly income. The result will be what
you have for the remaining two columns.
- Now it is time to make some decisions. What can
you do without? You need to eliminate as many expenses
as possible, so how about giving up the nail salon for
a while? How about getting a haircut every 6-8 weeks
instead of every 4? How about no more morning lattes
or restaurant lunches? If you look carefully, you will
see a number of things that you can cut out for the
short-term, so that additional money can go toward paying
off debt faster.
- Pick a credit card to attack, usually the one with
the smallest balance. Cut it up, and vow to take all
extra money you have “found” and apply it to that payment.
Any “windfall” money that comes in, such as a tax refund,
should be applied first to this credit card bill.
- Once the first credit card is paid, attack the second,
and so on.
Learning proper debt management may take a few years, but
if you stick to using a personal budget, in the long run,
you will have plenty of extra money to put into savings
and to enjoy some leisurely activities.
Commit to the philosophy that nothing will be purchased
until the cash has been saved for it, and that there will
always be some savings for emergencies. As your income increases,
you will see your savings grow, and you will be able to
afford vacations, nice dinners, etc. And, more important,
your credit will be great!
