Debt Management

What the Studies Show

Studies show that consumers at the 40 percent debt threshold are not saving any money and cycle their lifestyle through credit card use. The average American has nearly $9,000 in credit card debt alone – that does not include a mortgage, transportation, student loans or medical costs.

That being said, not all debt is bad. The majority of consumers will hold a certain level of debt in their lifetime. The skill of debt management relies on holding enough to establish a good credit history and obtain financial leverage without falling into common debt traps.

Steps for Debt Management

Successful debt management can be summed up in one word: planning. All savvy money managers travel a clear path of intent as to what to spend and what to save. Working from an action plan helps you realize financial goals more assuredly, even if a considerable amount of debt has to be cleared beforehand.

Follow Your Money

The first step is to consider all the ways you can reduce your debt. This requires a close examination of where your money goes and, more importantly, why you spend it the way you do.

Next, prepare your money decisions. Perhaps you can work from a budget or just modify spending to find areas where you can save and then apply that extra money to debt.

Evaluate Credit Cards

Proper credit management is an integral part of debt management. Do you really need a gas card, three bankcards and two merchant-specific cards? Sure, those credit card offers are tempting, but unless you have the time and inclination to continually review options and make payments in full, managing a myriad credit cards is a financial liability. Consider holding one or two primary cards.

Put a Payment Plan Together

If there are credit card balances or loans to rectify, systematically pay high-interest accounts off first. Consumers may also consider other debt consolidation solutions, such as borrowing from retirement accounts. This is a huge decision and can’t be taken lightly. Savings and retirement funds are already hard at work for your future financial security. Make sure to have a plan in place as to how you will once again commit to those accounts.

Save to Have Money and Save to Spend It

Finally, draw up a schedule for savings. There are two schools of thought on this: pay off all debt first, then save; or try to save while managing debt.

It all boils down to the numbers: the bigger the debt, the more attention it requires. But if you have manageable debt, such as home and auto loans, you should be able to set aside a considerable amount for emergency savings and retirement.

Financial advisors also recommend creating a “fun fund” to save for special treats, such as vacations, big-ticket purchases and entertainment in order to avoid just charging something on impulse and getting stuck into the payback rut. Psychologically, this method is also advantageous because it rewards you for responsible financial and debt management.

Tools to Aid in Debt Management

The website Smart Money.com has a few calculators and worksheets that enable you to plug in certain variables to determine debt status. This is helpful resource because often, until you lay it all out, you don’t know where to begin.

The LoveToKnow Mortgage site has a variety of calculators and expert information on managing one of the largest single debts an individual will hold in a lifetime. Wisely choosing the right mortgage can save thousands of dollars, build valuable equity and provide collateral for a home equity loan or line of credit, an option for consolidating debt.

Hiring the services of a certified credit counselor may also help in your pursuit of debt management. While many think to only go to a credit counselor when looking for options to escape creditors, credit counselors are skilled in establishing plans and methods at any stage of your financial journey. To find a local, reputable advisor, visit the National Foundation of Credit Counselors.