Managing Excessive Debt: It All Begins With A Plan

Serious debt problems arise when the amount you owe is out of balance with your income and household expenses (such as mortgage payments and utilities). The primary aim of managing your debt is to restore the balance either by increasing your income – difficult to achieve in an economic downturn – or setting and following a plan of action to manage the debt within your current income. 

Here are seven steps to assist you:

1. Face the facts. Excessive debt is both a financial problem and an emotional dilemma, and taking time to deal with the problem is the best way of  handling the stress it causes.  To begin, sit down with your family, adding up your debt, reviewing the situation, and asking everyone for their suggestions and support. Measure the debt you owe.  This may be upsetting at first, but deciding how to deal with it  instead of ignoring the problem is the first step toward feeling better.
2. Determine where the money goes. Each family member needs to write down his or her monthly expenses.Then identify the  ones that can be eliminated or reduced.  Then make a commitment to do it. The money saved from needless expenses is used to reduce the debt.
3. Separate good debt from bad debt. Good debt, like mortgages and student loans, delivers important benefits. Bad debt is expensive due to high interest rates charged for unnecessary goods and services you bought in the past. Department store credit cards represent most bad debts in families and should be targeted for to be paying off as soon as possible.
4. Take steps to free more income for debt reduction. These steps may include fewer restaurant meals each month, using discount coupons when shopping for groceries, and brown-bagging lunch. Brainstorm other ways to reduce monthly expenses and free money to pay your debts.
5. Put your savings to better use. “Saving for a rainy day” is a good idea, but not when the roof is leaking. Besides, money in your bank savings account pays next to nothing in interest these days, while some credit cards charge as much as 28 percent annual interest. Using your savings to reduce or eliminate this debt is a wise strategy.
6. Speaking of credit cards – DON’T. Credit cards represent the biggest source of debt problems for most people. If you have multiple credit cards, choose the one offering the lowest interest rate with no annual fee and use it for convenience purchases only. Destroy the other cards and pay off the balances.
7. Talk to your creditors. Ask about extending the amortization period for a personal loan or mortgage, reducing the regular payments required (this is a good move with today’s low interest rates). Apply the difference between your old higher payments and your new lower payments to reducing other debts.

Written by FaithLife Financial.