Ah, the new year. Time to set the new resolution for 2017.
January’s enthusiasm may fizzle by February, if you do not start right now. It is time to evaluation of your debt load and create a plan of action to be debt free.
Be it huge of small, everyone deals with the debt at least once in their life. While a small amount of debt needs a little effort to manage, a too much debt situation requires an effective debt management plan in action. Personalized debt management plan based on your current conditions and financial goals works much more effectively to reduce the debt.
However, without responsible execution of a proper plan, it becomes a difficult for you to get debt free. The following are some of the ways to deal with your debt and get debt free.
Income: When income is not enough, may be doing overtime and stretching should be considered. A part time job or even a second job could also prove fruitful. Other suggestions include giving the garage or an extra room for rent.
Awareness of debts owed: It is important to be completely aware of all that is owed. One must also query the concerned institution on interest rates charged. In order to check the amount owed, one may also audit the annual credit report.
Debt control – from plastic: Saving is essential since it helps budget for forgotten items of the regular budget or even ad-hoc emergency ones. This kind of planning becomes very important for the people who have sought a debt consolidation loan. Expenses should be better planned, only then debt reduction can be achieved. Plastic or credit card use should be minimal till the debt is completely paid off.
DMP plan: A DMP or debt management plan is where one monthly payment is shared by all creditors. The advantage here is that you can exit the option at any time due to lack of any legal binding. It often gets difficult to pay off high interest rate credit card balances. One can here switch to a zero % new APR (Annual percentage rate) credit card.
Loans with fixed rates: You are always advised to opt for loans which have a fixed rate of interest. This protects monthly instalments from market volatility. If completely fixed rate loans are not available, at least a portion should have the rate as fixed. Somethings you should be aware of are that fixed rates are usually higher than floating rates.
Offset accounts: A 100% offset account is often opted by many. Funds in this account will help reduce the interest burden for you. This is possible since the funds therein are reduced from the loan value at the time of interest calculation. To make the most of this option, you should keep all your earnings for as long as is possible in this account. For those with an investment loan, it is more beneficial to pay funds into the offset account as opposed to the investment loan. Tax benefits thereof will be higher for you.
Inefficient debt minimisation: Inefficient debt should be paid off faster. This will aid reduction of regular interest payments. Thus, you should try to enhance the equity ownership in your home. This can be leveraged for securing investment funds later. Smaller loans should be paid off on priority basis. This should help you reduce monthly pay outs. After the payment of smaller loans, you should focus on credit card obligations. They are usually high on interest. In case any windfalls have come your way, either from a bonus, lottery, or sale of property, use it to pay off debt first.
Regular repayments: If the loan does not have high early pay off charges, enhancing the regular payments will wipe out the loan faster and save interest costs for yourself. This is due to negation of continuous compounding affect. Here, redraw facility or offset account maybe used to maintain access to funds. You may want to keep a close eye on the early repayment fees.
Expenses and assets: Expenses also need to be curtailed for effective debt management. You should check spending on entertainment and recreation per se. For instance, a second car which is not required, maybe sold off for repayment of any loans. This decision should be taken to keep a practical perspective.
It is always advisable to use cash in case you feel using credit is not your thing. Many people successfully use credit and maintain good credit scores. Thus, debt management needs to be done through regular reminders and proper budgeting.
How do you manage your debt? You have a piece of advice for the readers, feel free to comment below.