Just came across a friend, and she told me she had gotten into a debt of $100K! I was stunned, and I supposedly believe anyone would. Someone who lives the same life as me has gotten into such a web, and how is that possible. I am guessing a lot of us get caught in it, and somehow it just happens. Everyone has a high probability to fall here, be it someone who earns thousands or billions.
Why Do People Get Caught in the Debt Cycle?
What triggers this situation in people’s lives? I am pretty sure no one wants to purposely get into it, but it happens anyway. But we all fall prey to temptations. How much were we hooked on Candy crush and Facebook scores, and most days played it on the work computer, sitting right at our desk? Or should we say, falling prey to the temptation of a 50% clearance sale, and also bought the rug that we for certain knew we never needed.
Would we do the same for a saving? Or an Investment? How many of us have fallen prey to overspending or spending most of our salary over a mutual fund? Or a new SIP? Quite rare I would say. But that is not the case for everything. A purchase off above $100 gives you a $10 cashback in the mall, and you have already queued up for your cashback without thinking about the 100-bucks. Apart from these teeny-tiny aspects of falling into the debt cycle, there are more, and they are;
- Poor Money Management
- Compulsive and Impulsive Spending
- A Slip in Income
- A Limited Saving Strategy
- The Social Pressure
- Marketing and the Media
- The Economic Bubbles
- An Emergency
- Mental Health
- A New Business
- …and More.
If you have fallen into the cycle with any of these or something apart from this, then here are a few steps you can practice to manage your debt and reduce your burden.
1. Know your Debts – Whom, Where, and How Much
The first step should always be to become conscious. When you begin your debt management journey, you should first learn about the many forms of debt that might show on your balance sheet. This is significant because some types of debt might have major consequences for your balance sheet.
Not all loans are created equal, and an effective debt management approach includes determining your whole debt portfolio. Begin by compiling a list of the various sorts of outstanding obligations; the creditors to whom you owe the money, the total amount owed; monthly installments; and the maturity date.
2. Get Some Clean Space – Start Organizing
List your debts, with their tenure and interest. Along with this, write how much you send as EMI to it every month. These will help you arrange your most urgent to your least urgent debts in a row and in order of their payment dates. By this, you can also focus on paying off your highest debts as quickly as possible.
3. Dates are Important – You Do Not Want to Sit Up Paying Penalties
Late payments on bills make it much more difficult to pay off your debt since they incur a late charge. You should use the power of technology to instill the habit of paying your bills on time. You may use your smartphone to set up notifications and reminders for your monthly payments. If you continue to skip payments, you should not wait until the next due date to make them.
In reality, you should make the payment as quickly as possible. You should also keep in mind that paying your dues on time is critical for efficient debt management.
4. Liquid Savings Play a Part – Have Some Money at a Reachable Distance
There is frequently a mismatch between our financial assets and liabilities, causing us to tap into our liquid resources. This is a potentially dangerous manoeuvre. While refinancing your mortgage at a cheaper rate is a good idea, you should also consider quickly rebuilding your liquid resources if you must make a sacrifice.
5. Make a Hardcore Budget – Everything that you Write Down Sticks
Creating a budget is a crucial debt management method for gradually paying off your debt. The procedure, on the other hand, needs much forethought and patience. The first step is to begin keeping track of your monthly income and spending.
Once you’ve identified this area, you may start thinking about methods to cut your daily expenses, the bulk of which could be unnecessary. This money can then be placed aside to repay the obligation, regardless of how tiny it is. Then, you should prioritize your debts to identify which payments, such as energy and mortgage bills, should be paid first.
6. Save More – Make it Habitual to Keep Adding to Your Savings
The most essential management principle is to continue saving more. While paying off your debt is a good thing, doing so at the price of your retirement funds may lead to disappointment. Instead, you may replenish your savings account on a regular basis to assist your savings to increase over time. The better approach is to pay off your obligations gradually and save as much as possible for the future.
7. Make that Comparison – Analyze What you Earn, Owe, and Spend
Apart from determining exactly what you owe, it may also be beneficial to understand how much money you have coming in, how much cash is necessary for the necessities, and where the remainder of your money may be going. This will assist you in determining where there may be room for movement and where you may be able to extract a little extra to contribute to your repayments.
8. Get Security – Always have a Plan B
When it comes to your finances, expecting the unexpected always goes a long way. Your loan provider may raise interest rates or modify repayment conditions, or you may face changes in your job or health that prevent you from working or making payments.
You might potentially prevent skipping repayments or accruing extra debt if you have a contingency plan in place, such as an emergency savings fund.
Make it a point to start managing the moment you get into a single debt instead of waiting for the drain to get clogged. There are times when it can get you overboard before you could imagine, and the other way around, and all of it revolves around your management skills.