Today, we will talk about consumer debt, why this happens and what you can do to tackle it.
It would have been a perfect world if everyone is debt-free. But the sad truth is most of us are in debt. The Federal Reserve System shows that in 2018, consumer credit increased by 5%.
Debt.com also wrote a good article on Personal Finance Statistics that shows the financial statistics of an average American household.
So let’s talk about debt.
What is Debt?
Consumer debt is what we owe from the bank, credit union or from the federal government. It can be a revolving debt, meaning you are supposed to pay it off every month. Credit cards usually fall under revolving credit.
It can also be a non-revolving debt, meaning the debt is supposed to be paid off at a set length of time. It can be called installment debt. Your student loan and car loan fall under this category.
Common Types of Debt
Debt is a distressing kind of word. It connotes overspending and living beyond your means. Although there is some truth to it, it is not always true to everyone.
Some people get into debt because they were in a difficult situation and had no other choice. It can be because of a family emergency, change in family
Below are some of the common types of debt that most people usually have.
Credit Card Debt
One of the most common types of debt is from credit cards. This is due to the ease of acquiring them and the convenience that they provide.
A credit card usually has low minimum payment and high-interest rates which can make the debt accumulate faster. Because of credit cards, the temptation to live beyond our means is high.
Student Loan Debt
This is a loan that is taken out to pay for education. It can be from the government or a private lender.
Student loan repayment becomes a problem when the graduate lands a low paying entry-level job. If the situation is coupled with the increased cost of living and a change in life situation, repayment will be more difficult.
Medical expenses are costly and when they happen during an unexpected time, it will be easy to accumulate debt. Repayment of this kind of debt will be difficult if the person involved will not be able to continue earning.
Car loan Debt
Car loans are loans that you can get from the bank, credit unions or car dealership in order to acquire a car.
Most people need a car and it is easy to qualify for a car loan. The car loans also have a fixed monthly payment, which makes it easy to plan for.
However, this can become a problem if you choose a car that is way beyond your budget. High car payments will take a big chunk of your monthly income.
A house is usually the most expensive purchase that you will ever make. Most people are not able to pay the full amount so they take out loans. The same thing with car buying, it is important to purchase the house that you know you can afford.
Having debt is one obstacle that keeps you from reaching your financial freedom. It keeps you from achieving the things that you want to do, like a
Debt can also cause too much stress to you and your spouse. You will have trouble sleeping at night because of worrying about how to make payments. All of this can eventually lead to serious medical problems.
So the sooner we get rid of debt, the sooner we achieve financial freedom.
You might also like:
- How to Start a Monthly Budget
- Do you Really Need an Emergency Fund?
- Beginner’s Quick Guide to Better Money Management
- The Best Budgeting Tools for an Organized Budget
- What you Need to Know about Budgeting with the Envelope System
Debt Management Solutions
Get to Know Your Overall Debt
To be able to know where you stand, write down all your debts, how much you owe, the interest rate and the minimum payment. Knowing all these pieces of information will give you an idea on how to tackle your debt.
After listing all your debts, there are two ways to tackle your debt. It can be through the avalanche method or the snowball method.
The Avalanche Method makes you pay extra money towards the debt with the highest interest.
The Snowball Method makes you pay extra money towards the debt with the smallest amount. Both of them has
Do not forget to start your monthly budget, check out this post on How to Start a Monthly Budget.
Set A Goal, Make A Plan and Write it Down
In order to tackle the debt, you have to set a goal. Give yourself a timeline, create a plan then put it down on a paper or in your computer if you prefer.
I am a visual person and I find that if I write down a goal, I tend to stick with it.
Consolidate Your Debt
Combining all your debts in order to have only one monthly payment can lower your debt. You will be able to secure a lower interest rate, therefore, saving you money.
Consolidating debt is done by borrowing money(total amount of your debts) from a bank with a lower interest rate. You will then use that money to pay off all your debts.
Pay More Than The Minimum Payment
Paying only the minimum can be costly in the long run. You are not only
On the other hand, if you pay more than the minimum, you will be able to save on interest and pay off the debt sooner.
Consider Balance Transfers
Check your credit card if you can negotiate a lower interest rate. If not, you can apply for a credit card which has a good balance transfer. It usually
Take note though that you must be able to pay off the amount before the specified date, otherwise, a high-interest rate will kick in. Balance transfer also incurs transfer fees.
Although this can be a good option to tackle your debt, it is not for everyone.
Decrease Your Expenses
In order to tackle debt, you should stop adding to it. You can do this by re-evaluating your expenses. Take a closer look at your spending habits and come up with some ideas to minimize them.
Trim down expenses as much as you can. Eliminate the ones that you can live without.
Increase Your Income
Increasing your income will give you extra money to pay down your debts. You can do this by doing overtime at your regular work or picking up some side hustles.
One thing I did to avoid the temptation of spending our side hustle income is to deposit it into a separate checking account. Then I make sure to use that extra money to pay down debts.
Sell Stuff You Do Not Need
You might not notice it but if you look closely on the stuff you have, you will find something that you don’t really need and will be able to sell.
You can do a garage sale, sell online or bring them to a store.
The Last Thing You Need To Know About Debt Management Solutions
When it comes to debt management, it is a marathon, not a sprint. To be able to make your game plan work and achieve financial independence, you will need discipline and a whole lot of patience.
For your plan to work, you have to STICK WITH YOUR GAME PLAN!
As with anything that we are not used to, it will be difficult at first. We will crumble along the way. But it’s ok, as long as we get right back up to our plan and learn from our mistakes.