Money Management

A Comprehensive Guide to Mastering the Art of Debt Management

We all dream of a debt-free life and the beauty of enjoying financial freedom. However, this goes beyond a wishful idea. It requires a lot of work and commitment. You will never gain financial freedom unless you master the art of debt management.

The increasing debt levels and rising living costs can financially throw you out of balance. However, you can get back on your feet easily with a good debt management plan. In this article, we will give you the major debt management aspects you should consider.

One of the most important steps in getting out of debt is assessing our financial situation. List the running debts, the acceptable minimum payments, and the interest rates. Prepare a spreadsheet and organize this information concisely to gain a clear understanding of your obligations.

Types of Debts

There are different types of debts, but they are all categorized into major categories; good or bad. Understanding how these debts work will help you make informed decisions and clear your loans quickly and efficiently. The most common types of loans are:

1. Secured Debt

This is a debt or a loan with valuable property backing known as collateral. Simply put, you cannot receive a secured loan without a property to put on the line. Some of the collaterals used include; lands, houses, or cars.

If you cannot settle your loan, the lender can seize the property (collateral) and sell it to recover their money. Mortgages and auto loans fall under this category.

2. Unsecured Loans

For an unsecured loan, there is no collateral tied to the loan. Some of these include; medical bills, credit cards, and personal loans. However, some personal loans have collateral attached to them depending on the agreement between the debtor and the creditor.

3. Resolving Debt

The most common types of resolving debt are HELOC (home equity lines of credit) or credit cards. Resolving credit allows you to borrow money repeatedly and repay it up to a certain credit limit. It also allows you to shop up to the given limit.

Paying the loan balance usually comes with interest, but it’s more flexible. A fundamental aspect of resolving debt involves establishing a fixed minimum payment interval, typically every month. If you have not cleared the debt by the end of the month, the remaining balance will attract extra interest. It also has a variable interest rate.

4. Mortgages and Installment Debt

This simply means installment credit or installment loans. Installment debts are close-ended, where borrowers pay back in scheduled payment agreements. The amount paid is usually the same in every installment. However, the borrower can pay more or clear all the debt in a single payment. Mortgages attract the lowest interest rates, which are usually tax-deductible.

5. Student Loans

Many students apply for student loans to pay for their expenses like board rooms and tuition. Student loans are typically a lump sum but are repaid regularly after graduation. Student loans can come from different lenders, including the government.

Create a Realistic Budget

Budget is the foundation of financial success. A solid budget enables informed choices, financial control, and goal achievement for you and your household. You can never ignore the importance of budgeting in gaining financial freedom. It is the cornerstone of proper money management.

Significance of Proper Budgeting

There are very many advantages of proper budgeting, some of which are listed below:

Debt management: It is easy to find yourself burdened by student loans, credit card debts, or mortgages. Most of the time, we find ourselves trapped because we overstretched our expenses. A realistic budget helps you make informed decisions and stay within your limit. At the same time, it will also help you gain more money to reduce your debts.

Financial Control: Setting a sensible budget helps you understand your financial situation (income and expenses). It will not only control your spending, but it’ll help you keep track of your income. This helps you make sober decisions and gain control of your finances. If you have a list of unnecessary expenses, a budget will help you eliminate them accordingly.

Financial goal setting and achievements: One key benefit of a budget is its power to establish and attain most, if not all, of your goals. It paves the way to your desired financial outcomes. Allocating resources wisely sets priorities and financial milestones, such as retirement savings and children’s education.

Prioritize Debts

As much as you have a lot of financial needs daily, prioritizing and settling debts goes a long way. You can start by offsetting the smallest balance while paying some installments in the larger ones. This strategy is referred to as the “debt snowball method.”

It motivates you and helps you build momentum as you eliminate your smaller and larger debts. This is never easy, but with discipline and willpower, it is achievable.

Tips for Debt Management

Paying and managing our debts is not an easy journey, especially if we have more than one debt. However, the tips below will make things much easier for you:

Boost your income: Increased income makes it easier to offset our debts. We can achieve this in many ways depending on our preferences and availability. Some options are: selling unused items, freelancing or taking on sales roles, and seeking higher-paying employment. A higher income allows you to direct the additional funds toward paying off your debts.

Explore debt consolidation: This simply means a combination of multiple debts into one. Consolidating your debts makes the loan more manageable and simplifies your repayment process. The amount will be more, but it might attract a lower interest rate.

Be accountable: Set debt repayment goals and share your plan with a trusted family member or friend. They will encourage you and keep you accountable for the loan repayment process. Regular check-ins will motivate and keep you focused throughout your debt repayment journey.

The road to your financial control and debt management journey requires commitment and discipline. Understanding debt and management elements and following them to book will give you lasting financial freedom.

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