The Importance of Good Debt Management
Debt can be a slippery slope. Anyone who has fallen behind on a credit card bill or faced a huge home repair can echo this sentiment.
Not only is good debt management important for your wallet and personal finances, financial strain can also wreak havoc on your mental health. Reducing debt and thereby financial stress can positively impact your mindset and overall mental health.
There are numerous benefits to good debt management. Some of the most notable perks include:
- Improved Credit Score
- Lower Interest
- Emergency Preparedness
Having debt negatively impacts your credit score. A credit score is calculated based on five factors: an individual’s payment history, amount owed, new credit lines, length of credit history and credit mix. Approximately 30% of your credit score is based on your outstanding debt. Having a good credit score can open up more borrowing and financing opportunities for you in the future!
When you keep your debt low, you have a higher credit score. A higher credit score will allow you to qualify for lower interest rates on loans. Regardless of if you are taking out a mortgage, a personal loan, title loans, or other type of borrowing, a lower interest rate will help you to pay off your debts quickly and will save you money in the long run!
Finally, effectively managing your debt will also help best situate yourself in case of an emergency. Reducing debt will help you to allocate more funds towards an emergency account and to have more disposable income.
Carefully minding your debt will help to set you and your family up for overall financial success, in both the short-term and long-term future!
What Are Debt Management Strategies?
After establishing debt management as one of your top priorities, it is important to know the specifics of how you will implement this into your life. While there are a wide variety of resources for individuals struggling with debt, there are two specific popular methods: the debt snowball method and the debt avalanche method.
What is the Debt Snowball Method?
The debt snowball method focuses on paying off the smallest debts first. The mentality here is that if you tackle the smallest debts first, this will free up more room for you to focus your attention on your other, larger debts.
While practicing the snowball method, you will continue to make minimum payments on your additional debts. After you have paid off all of your other small debts, you can then begin to increase the amount you are paying on your larger debts.
While this method is financially effective, it also carries numerous psychological benefits. Sitting in debt can be damaging to your mental health. By paying off small debts quickly, you will begin to see progress at a faster rate, and this momentum can help to propel you forward!
What is the Debt Avalanche Method?
The debt avalanche method is another debt management strategy that focuses on interest rates. When you attack your debt with the avalanche method, the first step is to list your debts by interest rate, with the highest interest rate at the top.
By tackling the debts with the highest interest first, you are freeing up funds to allocate toward the principal of your other debts. This method is equally as effective as the snowball method, but it may take a bit longer to see results.
What is the Most Effective Strategy for Paying Off Debt?
The most effective strategy for paying off debt can vary greatly from person to person. What works best for you depends on your individual and unique financial situation. You must take into account how much debt you have, what types of debt you have, your financial goals and level of motivation.
In addition to the above mentioned methods, you may also want to consider the following strategies:
- Debt Consolidation
- Debt Management Plan
- Debt Counseling
Debt consolidation involves combining all of your debts into a single loan. This process greatly helps to simplify your life by housing all of your debt in the same space. In addition, if you struggle with organization and have missed payments in the past, this helps to streamline this process. In addition, debt consolidation loans can sometimes come with lower interest rates, thereby saving you money. It is important to remember that in order to qualify for a debt consolidation loan, you may need to have a higher credit score.
If you are in need of more help and need structured support, you may want to consider a DMP or Debt Management Plan. With this, you work with a credit counseling agency that helps to negotiate your debt. These plans are ideal for individuals with a lot of debt who need the help of trained professionals. In addition, these agencies are often able to reduce your interest rate. However, when using a DMP you typically are no longer able to use your credit cards or access any additional lines of credit.
If you find yourself seeking additional advice, you may want to consider debt or credit counseling. No individual is born with the skills to budget and manage debt. If these life skills were not learned from others or self-taught, you may need some additional scaffolding to learn. With debt counseling, advisors from LoanMart can help you learn how to set and manage a budget along with other healthy financial life skills.
What are Ways to Reduce Debt?
If you are still looking for additional ways to reduce debt, you can start by increasing your income or reducing your other outgoing expenses.
If you are looking to increase your income, consider picking up a small side job. This will allow you to have extra money to put towards your debt to pay off debt at a faster rate! Consider marketing some of your skills such as writing, designing, cooking or sewing. Most retail stores hire seasonal help as well! Sites such as Indeed and ZipRecruiter can help to match you with jobs near you!
If time does not permit you to get another job, consider looking for additional ways to trim your outgoing expenses. Call your phone and cable providers and see if there are any discounts that you may qualify for, such as military, first responder or educator discounts. Evaluate your monthly subscriptions, and make sure you only subscribe to services that you are actively using.
Regardless of the adjustments that you make, know that the work that you put in to get out of debt is worthwhile! The adjustments that you need to make to get out of debt are also temporary! Once you get out of debt, you will find that you have funds to allocate towards savings, entertainment and your financial future!
