Thursday, May 28, 2009

Budget Right: Debt Managementt

Debt is a familiar term for most of us. Whether it be student loans, a mortgage or maxed out credit cards, debt is a real and vibrating force in many of our financial lives. Some of us like to sweep it under the rug, and put on the persona that everything is fine and dandy. But in reality, its not so fine and dandy when those statements come in. So how does a normal person deal with this? Do you pay the minimum? Do you ignore it? Is it even something that can be managed? I'm here to answer all those questions in this post about debt management.

Types of Debt
  1. Student Loans-- This is referred to as 'good debt' because it really is an investment in your furture. So don't get down on the fact that you still owe over 40 grand. However, it is VERY important to not ignore this debt. If you do, you risk defaulting, causing your credit to not only plumment, but your loan will automatically be due in FULL. If you are having trouble paying your monthly payments, contact your lender. They can usually help you out by offering a lower monthly payment depending on your situation.
  2. Mortgage-- This is your house. Believe it or not, most people don't own the homes they live in- the bank does! Right now there are tons of government programs in the works to help people who are having trouble paying their mortgage due to variable interests rates and recent layoffs. However, do not simply view your home as an investment-- it a place to live, a roof over your head. You are paying for shelter. Having a mortgage may increase your credit, but be careful not to default on these or you could have trouble taking out another one in the future.
  3. Credit Cards-- Credit cards are either your friend or your enemy depending on how you use them. They can be an excellent way to consolidate finances, providing you pay the amount you owe in FULL each month. DO NOT pay the minimal amount due if you can help it. Interest rates, especially now, are jumping at unbelievable heights. If you pay the minimum, you risk getting yourself sucked into a whirlwind of debt that may take years to get out of.
There are other types of debt out there, but I am just covering the basics. So, what do you do when you find yourself with all this debt each month? Here is what I recommend you do in beginning debt management:
  • Pay the minimum due each month for student loans. The bigger the payment the better, but only pay extra if you don't have any other debt.
  • Pay the minimum due each month for your mortgage, but double up on one month each year. This will get your ahead in your payments and help you own that house sooner. It also saves you money that you could otherwise have lost due to interest.
  • Pay your credit card bill in FULL each month. If you are a victim of whirlwind debt, I suggest you pay off the smallest amount first. For example, if you own 100$ to credit card #1 and 5000$ to credit card#2, pay the most you can on credit card #1 until it is paid off, but just pay the minimum on #2. Do this with each card until you have no more debt.
In my next post of Budget Right, I will cover how to get control of your finances to avoid incurring any additional debt by creating a budget.

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