Introduction

How to get out of debt is a pertinent question. Debt management is the ultimate way to improve your long-term financial standing in the society. By managing debt, we can also manage our stress. Consider debt as an unfinished task and you would be able to feel the level of stress like any other unfinished task. But debt is a long-term problem and without managing it or paying it off earlier, the financial situation will be in negative. In this blog post, I would like to explain the types of debt and I would also impress upon the importance of debt management as a priority task.

What YOU Should Know

• Prioritize Budgeting: Creating and adhering to a budget is crucial for debt management. A well-structured budget reveals unnecessary expenses, helping you allocate more funds toward paying off your debts, thereby enhancing your long-term financial health.
• Employ the Debt Snowball Method: Start by listing your debts from smallest to largest, regardless of interest rates. Pay the minimum on all debts but channel extra funds to the smallest debt. Once cleared, move to the next smallest. This method builds momentum and a psychological boost as you eliminate debts one by one.
• Leverage the Debt Avalanche Strategy: Arrange your debts by interest rates in ascending order. Focus on paying off the highest interest debt first while making minimum payments on others. This approach minimizes the total interest paid over time, effectively tackling the most costly debts sooner.
• Consider Debt Consolidation: Combine multiple high-interest debts into a single lower-interest debt. For instance, if you have credit card debts with 22% interest, consolidating them into a new card with 11-15% interest can significantly reduce your monthly payment burden and save money in the long run.
• Understand Different Debt Types: Recognize and differentiate between secured debts like mortgages and car loans, and revolving debts like credit cards. Understanding the nature and implications of each can help you strategize better on how to manage and prioritize their repayment.

How to Get Out of Debt : A Review

Types of Debt

There are different types of debts that people around the world choose according to the situation. These debts vary in time as well as in interest rates. The timeframe is usually from a year to around 30 years. The range starts from anywhere around 7% for mortgage to around 28% for an average credit card interest rate Forbes. Let’s look at some of the most common debt types.

Secured Debt: My Dream House

The mortgage that people usually take for financing their dream houses falls under the category of Secured debt. Secured debt is a debt that is secured because if you fail to pay the monthly payments, the dream house will be used as a collateral, so the bank’s money is secured, and you are under the stress of paying the payments according to your payment plan that can be in 2024 7% interest rate with approximately 10-30 years plan. You should also not forget about the payments for managing the house that will also include taxes and repairs if the property is relatively old.

Revolving Debt: My Credit Card has Many Perks

Credit cards provide everyone with the ease of payment nationally as well as internationally. Nowadays they also have cashback programs that most of the people are using. Credit card falls under the category of revolving debt. It starts with a limit, you use that limit, you pay the money and the next month same story. It keeps on revolving because it is open-ended, and the limit renews when the used balance is paid.

Your card has many perks but wait till you miss a payment and you would have to pay more than 15% interest on the payment that you have missed. The perks and cashback will be overshadowed when you will get to know that Americans’ total balance of credit cards in Q2 2024 is standing at 1.142$ trillion lendingtree.

Car Loans: My Dream Car

Car loans also belong to the secured debt section. In the case of payment failure, your latest model car will be repossessed by the bank or by the dealership. Car loans range is between 3-5 years with interest that should be paid over the lump sum amount of the loan taken.

Debt Management Plan

Imagine a graph starting from 0 and ending at 100. The graph tells you about your age on x-axis and net worth on y axis. I am sorry to say that a family will not be able to find itself on this graph. You know the reason, debt not paid off, will keep you negative for the years to come and hence you must make your balance sheet positive to start building your net worth. Let’s look at some ways to improve your net worth by managing different debts.

Budgeting: Pull the brakes

The first and foremost is to design a plan. A plan to help you navigate while being aware of your income and your expenses. The plan is called a budget, whether for a single person or a family. A budget shows us a limit, a boundary needed to lead a balanced and successful life. How is it possible that you don’t want people to cross a boundary in some matters, don’t want your coworkers/colleagues to discuss your personal matters and even your friends can’t just go limitless, but you are spending unwisely, arrogantly and without limits.

This is hurting you, because you are already in debt and by overstretching yourself, you are further bruising your future financial standing. By defining a budget, you would be able to see the expense overflow and you will be forced by yourself to cut these expenses.

Debt Snowball Method: Attack the smallest first

The method illustrates the importance of listing debt from smallest to largest value Irrespective of Interest Rate. After understanding the hierarchy of your debts, start paying equal minimum payments toward all debts. Now, prioritize the smallest debt amount and add some extra money to attack this debt and finish it at the earliest. The amount of the smallest finished debt will be used to pay the next smallest debt and so on until all the debts are finished. If you can make budgeting your habit, the snowball method will be finished earlier because of the expense reduction.

Debt Avalanche Method: Big Interest Big Problem

The method targets the interest rates instead of balances. Debt Avalanche method also requires us to arrange the debt in ascending order. After we have the picture of our debt balances and interest rates. The minimum payments should be made towards all, but extra payment should also be made towards the balance having the highest interest rate APR in most cases credit card interest. This way we can save ourselves from high interest debt in a comparably shorter period. By budgeting your expenses, bigger extra payments can be paid for high interest debt resulting in paying less interest over time because of finishing the high interest target.

Debt Consolidation: Less damage but damage

This is a way to save yourself from high interest rate debts. Debt consolidation reduces the debt interest rate if you could club together your previous high interest rate credit card debts into a new credit card debt with less interest rate. If initially you were paying 22% on your 2 credit cards, the new credit card might offer you somewhere between 11-15% and you would be able to make less payment per month on your new credit card. Hence saving you some money.

Conclusion

Debt management is not just a financial strategy; it is a pathway to a healthier, less stressful life and a more secure future. By understanding the various types of debt—whether it’s a mortgage, credit card debt or car loans—we can better appreciate the importance of proactively managing what we owe. Incorporating strategies such as budgeting, the Debt Snowball Method, the Debt Avalanche Method and debt consolidation method can significantly aid in reducing debts and improving our financial standing.

A well-crafted budget serves as the foundation, providing a clear picture of our income and expenses and helping us identify areas where we can cut costs. The Debt Snowball and Debt Avalanche methods offer structured approaches to eliminate debt, whether by tackling the smallest balances first or by focusing on high-interest obligations. Debt consolidation offers an opportunity to reduce the burden of high-interest rates, enabling more manageable monthly payments.

Ultimately, the goal is to pay off debts efficiently and effectively, thus freeing up resources that can be redirected towards building wealth and achieving financial independence. Managing debt wisely not only improves your immediate financial health but sets you on a path toward long-term prosperity. Make debt management a priority and take the necessary steps today to secure a more stable and financially robust future.