Managing Your Debt and Personal Loans

The lure of easy credit is so pervasive that many people take advantage of the multitude of credit cards, personal loans, and other financing option until they find themselves mired in debt. Once you get in debt it can be very challenging to get out of it. Here are some key tips that can help you to manage your debt.

Understanding Your Current Spending and Saving Habits

How much debt you accumulate and how financially able you are to pay it off can be difficult to visualize. Create a budget that can help you to understand how much money you are currently pulling in, net of taxes, and both your fixed and variable costs. Keeping this information in a spreadsheet and updating your budget regularly can provide you with a clear picture of the remaining money that you have available to save for your future or to repay your existing debt levels. A budget is a great tool to assist you with understanding your current financial position and can help to highlight areas where you are spending too much money.

Changing Your Lifestyle

Ultimately, people who are in debt will have, at one point of their lives, spent more money than they earned. A budget is a great tool for highlighting how much money you have to spend without getting yourself further into debt. Ultimately though, understanding the problem and working on eliminating it are two separate things. If you are in debt and find yourself unable to make your debt payments, one of the keys should be reexamining and potentially changing your lifestyle, either by finding new ways to earn additional income or to reduce your expenses.

Sometimes subtle lifestyle changes can make a big difference such as cooking your own meals instead of buying processed foods, decreasing your discretionary expenses, and using public transportation. For more serious shortfalls, you may want to consider downsizing your living space or getting a roommate to share your space. Use your savings from your expense reductions to accelerate the repayment of

Deciding Which Debt to Pay Off First

It is a good exercise to lay out your debt and to detail out the repayment terms, interest rate, and any other restrictions caused by your debt (guarantees or liens). From here, you can rate your debt so that you can decide which debt is the best to pay off first.

Generally speaking, it is best to repay debt that has higher interest rates associated with it first. By doing so, you can reduce the total interest that you pay over the life of your loan and will ultimately repay your debt faster. This strategy of repaying loans with higher interest rates first is sometimes known as a debt avalanche, as the repayment of your debt will accelerate faster and faster as your regular interest payment diminishes. If you don’t understand the terms of your debt, visit a local financial planner in Sydney and ask them to explain the terms to you.

One of the challenges with the debt avalanche strategy for repaying your debt is the lack of progress that many people experience, at least initially. While the total debt that you have will decrease in the fastest rate using this strategy, the monthly payment amount that you have will not go down quickly using this methodology. As such, some people prefer the psychological benefit associated with the debt snowball method of debt repayment which has your individual loans disappear one by one as you repay your debt. Under this strategy, borrowers will pay off the loans with small balances first before moving onto the next outstanding debt balance. As debt is repaid, your monthly payments will decrease significantly. While the debt snowball strategy is less logical than the debt avalanche strategy, it provides a psychological benefit that lets a borrower feel progress towards repaying debt that may keep them committed to their debt repayment when they might otherwise lose interest in doing so.

Questioning Debt Consolidation

One option that many people take advantage of is debt consolidation. When you consolidate your debt, you restructure your existing debt under a new loan with a new interest rate and repayment terms. If the current interest rate being offered is lower than the rate you currently pay on your debt, it makes sense to consolidate your debt. However, if you are extending the length of time your debt is outstanding, even if your new debt has a lower interest rate, you may end up paying more for your debt over the length of your loan. While this may not be a bad thing if you are currently financially pressed but are not likely to be in the future, you should question the premise to consolidating your debt rather than seeing it as a catch-all solution for your financial woes.

Ultimately, getting yourself out of debt involves understanding your finances and debt, then making changes in your lifestyle to improve your ability to repay you debt. Once this I done, you should develop a strategy regarding how you will tackle your debt repayment, either through consolidating it or by paying off the debt with the highest interest rates associated with them or with the lowest outstanding debt balance.

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