Money management is one topic which most of us will tend to give less emphasis on. In 2013, the total U.S. revolving debt stands at $847 billion, which is equal to the GDP of both Belgium and Denmark combined. This amount has increased to $887.9 billion as of January 2015.
As equally important as knowing how to invest to supplement your income, knowing how to manage your money well can also help you to get to financial freedom sooner. After all, no matter how much you earn, it would not be enough if you do not know how to control your spendings.
Admit it! You are in debt
Are you spending lesser than your total income? Have you managed to save any money at the end of the month? If the answer to both questions is a “Yes” congratulations to you as you should not in debt. However, if you answered “No” for one or both of the questions, do not give yourself any reasons to why you have overspent this month.
To help yourself out of debt, the first important thing that you should do is to admit that you are already in debt and look back, why you have spent more than what you should have. Only then you will be able to work on it and help yourself to get yourself out of debt.
Goals Goals Goals…
Once you have gotten past the first step to admitting that you are already in debt, which is great, the next step will be setting up goals to get yourself out of it.
Have you wondered why is it that the government spends so much time each year debating over the issues with regards to budgeting for the year? The government is an individual just like us, without proper budgeting of how much income the country receives for that year and how much expenses is expected for the next year, it would be easy for a country to overspend and the country will very soon be in debt.
Picking up the calls
Unless you owe money to loan sharks, I would recommend you to pick up the calls of your creditors and have a chat with them. Tell them about your problem, let them know how you plan to repay them. No creditors will want to force their debtors up the wall, to their deaths. In fact even loan sharks don’t.
Creditors lend money hoping to receive their money back, with an interest. If their debtors defaults on their payment, they will do something to get them repay their debts back. If the debtors are being forced to their deaths, the money they owe is likely to be not recoverable anymore. Something that the creditors would not want to see.
If you contact your creditors with a sound plan, all the more they will be happy to help you repay your debt faster.
Highest interest first
Fighting to keep yourself out of debt with more than one creditors is like fighting a war with many fronts. Historically, if a country is confronted by many enemies on many sides, if they do not concentrate on fighting on just one enemy, very soon, they will be losing grounds and eventually lose their country.
Just like fighting a war with many sides, concentrate your money to repay one creditor at a time. If possible, consolidate all your debts to only one creditor. Else, try to clear one creditor at a time.
If clearing one creditor at a time, which one should it be?
Compounding interest can be a friend as well as a foe. When it is at your side, earning money will get easier. However, if it is against you, you will have to work double hard just to fight against it.
Clearing the debt with the highest interest rate will help you to clear your debt faster.
Pay yourself first
One last point about getting out of debt may sound a bit counter-intuitive. Contrary to what most people usually will say, I personally feel that to get out of debt, you should always pay yourself first.
What does it mean to pay yourself first?
When you receive your pay check, always set an amount aside for your savings and an estimated amount you will require to spend for your daily expenses. This should be done automatically. After all of those have been saved aside, the remaining of the money then should go to pay for your debts.
Why pay yourself first is better?
Assuming you have a total debt of $120,000 and every month after all the expenditures, you are left with $2,000. If you were to put everything into repaying the debt, you will eventually pay off the debt in 60 months. From there on, you will be starting off from zero, almost five years late.
However, if you put $1,500 to repaying the debt and $500 to invest, you will take more time to repay your debt. But five years later, your investments will return you an annual dividend of $1,343.57. Reinvesting the dividends, you will get a 5 years head start to receiving a passive income enough to sustain your daily expenses.
In one of my previous posts, I have talked about the benefits of starting early. Something that you should also do even when you are in debt.
The bottom line
When you are already in debt, the most important thing to do is to take the first step to acknowledge that you need to do something about it and change your lifestyle to reduce your debts and not continue on splurging and sink further and further into debt. After you have managed to reduce your debt down to zero, remember to keep it that way to prevent yourself from sinking into another debt.