Debt Management Strategies

Debt is borrowed money that you can use to help you achieve your lifestyle goals. It need not be feared if it is managed well. Experts maintain that the secret to debt management is to practice effective strategies even before you experience debt problems.

Debt is money you owe to someone else, also known as your creditor. You incur debt in the ordinary sense almost everyday as you use electricity, consume water, or purchase supplies with your credit card. Others go further into debt when they purchase a car or home by signing up for a financing loan, or when they use a loan’s proceeds to purchase assets for investments like real estate and shares of stock.

The goal of debt management is to lower your debt and eventually eliminate it using a strategy or series of strategies.

Financial education: Your first step in managing debt is to educate yourself in budgeting and financial planning. You need to know what your sources of income are and where your money is going.

Getting a clear picture of your cash inflow and outflow allows you to plan your expenses—when to incur them, how much to incur and when to pay them, keeping in mind that your total expenses should not exceed how much you earn monthly to avoid being in debt.

You can learn the basics of financial planning through self study, by taking a course or under the guidance of a credit or financial counsellor.

Increasing regular payments: Whether you’re dealing with credit card debt or a mortgage loan, you can reduce your debt by increasing the amount of your regular repayments. This will reduce the amount of your interest and the balance on your principal amount. This strategy works best when you have extra savings lying around, experience a sudden cash windfall or reasonably expect your monthly income to increase.

Offer to make a lump sum payment: When you have fallen behind your monthly payments and have accumulated a large balance due to the monthly interest and penalties, you can work out a debt solution where you will make a one-off cash payment in an amount that is much less than the total value of your debt. This strategy often works when your debt has more than 120 days in arrears because the company may decide to write off the unpaid portion of your debt. Be aware that this may drain you temporarily of funds to repay other loans and emergency expenses.

These are just some of the simple strategies for debt management that you can use while more complex ones such as using your credit card in conjunction with your loan, availing of the redraw facility and debt consolidation can be learned from a credit or financial counsellor.