Excessive debt is something many people are faced with today. It is scary, overwhelming, and can keep you awake at night with worry. And while it is tempting to hide your head in the sand and ignore your debt, that does nothing to solve your problem.
1. The first step in handling excessive debt is to focus on facts.
You must know three things:
- how much you owe
- your monthly payments
- interest costs
A good analysis is the first step back to positive financial health. Let’s say, for example, you have a monthly net income of $4000. If you pay $200 per month in interest charges, then you are paying 5% of your income for basically nothing. You are paying $200.00 a month for the privilege of having whatever you bought on credit.
The question you must face every time you buy something on credit is whether it is worth the extra percentage of your income each month to have it. Next time it may be a better decision to set aside that $200.00 a month and save up for the big ticket item you want to purchase.
You run into major debt problems when that $200 a month (and for many it’s much more) becomes the total amount you are able to pay each month. This is troublesome because you have now reached a point where the debt will never get paid off. If all the money is going to interest, then none is going to principal.
Consider a real-life example. Suppose you want to purchase something for $10,000 and put it on your credit card which charges 13.9% interest. If you pay $200.00 a month, it would take you 6 years and 3 months to pay off the loan. In the end, with interest, you will have paid $15,019.50 which is $5019.50 more than the original price. The interest increased the cost of your purchase by 50%!
2. Now that you have an accurate picture of your finances, you need to develop a budget.
Develop a budget that allocates payments (as large as you can manage) to get your bills paid off. The ‘snowball method‘ is one method where you pay off the smallest debt first. Or perhaps you’d like to try to pay the largest bill first. Paying the largest bill off first saves you the most in interest charges, but it’s hard to stick to because the progress is so slow.
3. Stop borrowing.
For many, this is the hardest but most important step. Do not allow yourself to take on any more debt until you have paid the down the first.
Facing reality and dedicating yourself to long-term change are two imperative steps you must take to overcome financially turbulent waters. Take it one step at a time, and one day at a time, and before you know it you will be debt free!
How are you handling your debt? Tell me in the comments – I’d love to hear your ideas.