How many of us make major purchases in our everyday lives without thinking twice? The answer could vary from person to person, but more often than not, we do think a bit before making a big purchase. There are also a few situations in life, wherein we may not possess the adequate amount of capital that’s required for big-ticket life events. This could lead to individuals raising debts to meet their financial objectives. Debt, then, has quite a significant role to play in that individual’s life.
The ability to manage debt is just as important as financing events. Management of debt doesn’t seem too big of a task when you take on just a small amount of debt. But as our needs grow with time, the burden of debt also progressively grows if we do not keep a check on it. In such a situation, a systematic and organised mechanism needs to be designed to effectively manage the debt burden.
Follow these seven simple steps to effortlessly manage your debt:
- Know whom you owe and how much: The first step should always be about awareness. When you start out on your journey of debt management, you should start with studying the different types of debt that can appear on your balance sheet. This is important since certain kinds of debt may have more serious implications on your balance sheet. Not all debts are created equally, and an effective management strategy revolves around figuring out your entire debt portfolio. So, start with making a list of the different types of outstanding debts; the creditors you owe the sum to; the total amount of debt; monthly instalments; and the maturity date. Additionally, you can also leverage online banking tools to collate this information. You can refer to this list periodically, especially while paying bills. As your debt amount changes each month, you should try not to forget to update this list as well.
- Pay your bills on time: Late payments on bills make it that much harder to pay off your debt since they involve a late fee. To inculcate the habit of paying your bills on time, you should take advantage of the power of technology. You can set alerts and reminders for your monthly payments on your smartphone. If you still miss a payment, you shouldn’t wait until the next due date to make the payment. In fact, you should make the payment in question as soon as you can. You should also remember that making your payments on time is of utmost importance for effective debt management. While a couple of late payments may not seem like an issue to most of us; but making a habit of missing payments can have a significant impact on both your ability to pay further and on your credit rating (also known as credit score). You can opt for the auto-debit facility provided by your bank to ensure regular payments.
- Have liquid savings: There is often a mismatch between our financial assets and the liabilities, which tempt us to dip into our liquid savings. This is a potentially harmful move. While refinancing your mortgage at a lower rate is smart, you should also look at immediately rebuilding your liquid savings if you must compromise on them.
- Have a budget in place: Putting a budget together is an important debt management technique for eventually getting rid of your debt. The process, however, requires a generous amount of planning and patience. The first step is to start tracking your monthly income and expenses. Once you have this area identified, you can think of ways to reduce your everyday expenditure, the majority of which could be wasteful. This money can then be set aside to repay the debt, irrespective of how small the amount is. Then, you should prioritise your debts to determine the most important bills, like utility and mortgage bills, to be paid first. While getting yourself out of the debt-ridden cycle can take some time, remaining focused on your budget and inculcating discipline are certain ways to achieve success in this context. Keeping a budget ensures that you have enough money to comfortably cover all your major monthly expenses. If you see yourself lagging with your payments, start planning well in advance to be able to take early action. Therefore, a budget is extremely helpful in debt management since it puts the extra money to good use (to be used to pay off debt faster).
Watch interest rate risk: We may borrow money for a variety of reasons – education, marriage, a vehicle purchase, personal loan, and so on. When you borrow funds at a variable interest rate, the cost of the loan rises with the market rate. This is a significant risk that needs to be adequately addressed by debtors to avoid having to shell out more than they borrowed.
Have an emergency fund for backup: Life is unpredictable and can put us in need of urgent funds at any time. And without adequate savings, we’d have to resort to either formal or informal debt to take care of such needs. Thus, one should always have an emergency fund, as a hedge against unforeseen events.
Save more: The most important management tenet is to keep saving more. While paying your debt off is great, offloading it at the expense of your retirement savings might just result in disappointment. Instead, you can periodically stock your savings account with adequate funds to help your savings grow over time. The wiser option is to slowly pay your debts off and maximise savings for the future.