Managing debt can be a part of everyday life. Many people go into debt to finance large expenses, such as homes, cars, and education. Credit products can also be used to make everyday purchases more convenient.
Here are some practical strategies to help you manage your debt effectively, work toward your goal of being debt-free, and gain greater control over your personal finances.
Make a List of All Outstanding Debts
Listing all your debts on a single sheet of paper is the first step in creating a financial management plan. Be sure to include the following information for each debt:
l Debt type (e.g., mortgage, personal loan, etc.)
l Amount owed
l Minimum monthly payment
l Interest rate
Check this list against your credit report to make sure you have no other outstanding debts.
Create a Debt Management Plan
Now that you have a comprehensive list of your debts, here’s how to create an effective debt management plan:
l Create a budget: A budget can help you understand your cash flow and identify the money you can use to pay off your debts.
l Track your expenses and find room to cut back: Knowing exactly where your money is going can help you gain greater control over your finances.
l Adjust your plan as needed: Review and adjust your plan over time or as you encounter changes in income, expenses, or unexpected changes. Tracking your spending gives you information to flex your budget and better manage your debt.
l Pay your balances on time: Avoid extra fees or interest by paying your bills on time. Late payments can also have a negative impact on your credit score, which is affected by your credit history. Every time you apply for or receive credit, every time you make or miss a payment, and every time you use credit, it goes into your credit history. Your credit score is dynamic and will adjust as your financial situation changes. Consider setting up automatic payments to make this step easier, and then make a habit of regularly reviewing your account balance statements to make sure you're paying the right amount each month.
Decide on a strategy to pay off your debt
Creating and following a plan can help you pay off your debt. There are several common debt payoff strategies.
l Avalanche method: Pay off the highest-interest debt first with available funds to pay it off faster while also meeting the minimum payments on other debts. Then, once the highest-interest debt is paid off, you can shift your focus to the debt with the next highest interest rate, and so on. This approach is designed to help lower the total amount of interest you might pay by putting more money toward paying down the principal of the debt with the highest interest rate.
l Snowball method: First, use your available funds to pay off the debt with the smallest total amount owed to pay it off faster while also meeting the minimum payments on your other debts. Next, use the remaining available funds to pay off the debt with the second lowest amount owed, and so on. This approach may be more appropriate if you prefer to win quickly.
l Debt consolidation: If you prefer to make one monthly payment rather than manage multiple bills, consolidating your debt may be worth considering. This helps make it easier to manage payments on all of your existing debts, and usually involves a single interest rate that is lower than your current highest interest rate.
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