Today we have a special treat for you at home. Joining us on the blog is Amy, who reached out and is a passionate personal finance writer. If you'd like to know more about her take a look at the bottom of the post. We do occasionally accept guest posts so feel free to reach out. Now onto Amy.
Debts are painful. How much? People ask those who have recently got out of it. They may also share with you the lessons that they have learned from their debts.
While people admit that they learned some great money lessons from debt and have happily implemented them in their lives to stay away from it. However, there are others who don't learn from their past debt/s and fall into a cycle of debt in their lives.
Today's post is about great money lessons that debt can give us:
1. Importance of keeping the spending record or as we call a plan
One of the most effective tactics is to record your spending. In the majority of cases, people usually don’t fall into debt due to a big ticket purchase, rather it accumulates gradually due to numerous small purchases without making the payments on time. If you keep records of all your spending, then you would surely be in a better position to reduce it also, if required. While you may not need to continue doing this forever, track how it affects your debts.
Categorizing your spending is a good practice to classify the your monthly expenses. Try to categorize your spending as ‘must have’, ‘should have’ and ‘want to have’ to reduce spending money that you don't need. This way you can control over expenditures. The ‘must have’ group should include items such as food and medicine you should not compromise with to reduce your monthly spending.
2. The power of personal budgeting
Personal budgeting plays an important role to make monthly debt payments. It allows you to eliminate unnecessary expenditures and to save some money every month. By going through the last month’s budget using the above numbers and the amount you spent on each category of items. Take the hint from the last month and cut down expenditure in the coming month.
3. Consider following the debt snowball method
Professional debt relief strategies may be your best option in the short term; however for long-term solutions to your debt crisis, debt snowball method is likely to give you the highest success. It includes the following few steps to be followed.
- Organize the debts from lowest balance to highest balance.
Make the minimum payments on all debts.
Target the lowest debt first and make some extra payment towards it each month.
Keep aside a certain amount of money every month to pay some extra toward the debt.
However, debt avalanche is another DIY debt payoff strategy you can follow. In debt avalanche method, the strategy is targeting the highest interest rate debt first while paying the minimum to the rest.
While both debt payoff strategies can be effective ways to kill the debt, it is up to you to choose one according to your financial situation and goals.
4. Benefits of making payments on time
Many of you don't make repayments on time and this causes debt problems. If you want to get out of debt, it is important that you pay your bills on time. Make the payments as soon as they come in. You can also set reminder to remember the payment dates using your smartphone. Also take advantage of online payment and automated payment services to avoid any financial mess. Once you are comfortably out of debt consider then paying yourself first.
5. Advantage of staying away from further debts
Once you acknowledge that your debts are not serving you consider whether you need to accumulate further debts. Make efforts to stop unnecessary spending that includes CDs, DVDs, clothing, books, gadgets, magazines, etc. Essential items may include housing, auto, gas (or what we call fuel here down under), bills, groceries, etc. If credit cards are mainly responsible for your debt woes, look to cut the credit card expenses. Also, resist the temptation of impulse purchase and abstain from too much online buying.
6. Value of saving money
Live within your means to avoid incurring debts. If you want to make your future financially secured, you should not overspend. It is advised that you should set aside some money every month for savings. Financial experts say that you should save at least 20% of your income. Thus, you will be able to build up a financial cushion to secure your future aka an emergency fund
7. The significance of an emergency fund
One excellent way to get out of debt is to establish an emergency fund to meet some unforeseen happening like job loss, accident, medical issue. It is recommended to keep this emergency fund liquid but should not be immediately accessible. One should not keep this money tied up with a debit card. The amount should no way be used on non-essential items.
Lastly, the most important thing is you must acknowledge the problem that you are facing. You need to admit the reality that you are into debt due to spending money that you do not have. You also need to believe that you can manage your debts by reducing your expenses. Once you learn these lessons, you can stay away from future debts throughout your life.
Money Glee comment about Debt: Keep in mind that there is good vs. bad debt, which is an article we'll talk more about
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Author's Bio: Amy Nickson is a web enthusiast. She completed her graduation from Oglethorpe University, Atlanta, Georgia. She works as a financial writer and she shares her expertise through her crisp and well researched articles based on money management, money saving ideas, debt, and so on. You can follow her on Oak View Law Group where she shares her expertise on personal finance field.