In recent years, going through and following the economic recession of the mid-2000s, a lot of people have been more wary when it comes to debt. To properly deal with debt you’ll want to make follow a simple system that will allow you to borrow but still avoid drowning in unpaid bills. To get ahead simply follow these five important tips.
First off, consider the basic principle of borrowing only when necessary. You want to spend less than what you earn. In those times when you do need to borrow always borrow less than what is available to take.
Living in this kind of budget might seem tight at first. However, as you continue to build good credit and balance your expenses with your income you’ll never find yourself deep in debt. It’s a precautionary step that still allows you to spend.
To calculate for this you need to tally your monthly debt. Include all of your loans, credit payments, and others. Now take your annual income (prior to taxes) and then divide it by 12. Divide your monthly income by your monthly debt.
If the ratio is below 20% then you are doing amazingly. Going up to 36% and you’re in the average area. This is still good. Going above 40% and you’re in financial trouble.
Getting out of that danger zone is where the third tip comes in. You’ll want to start by tallying all of your current debt in a list so you can monitor everything you still need to pay. Re-organize your monthly budget so you can prioritize on what needs to get paid off.
While paying off debt, avoid adding additional debt to the list. Never pay a debt by taking another loan. Use extra cash-on-hand as much as possible. If you do not have emergency funds then this is the time to start building one.
The fourth tip is to call your lender. Even when you aren’t swamped with debts to pay you will want to ask them for help the moment your debt-to-income ratio gets a little high.
Sometimes you might not be aware but you could be entitled to lower interest rates or better financing. Your credit might have improved and one call to your lender could readjust how much you’re shelling out for mortgage.
However, their biggest help comes when you are in that danger zone. They can look into your expenses, assess how your budget is being managed, and see if they can give you better options. Most of the time you end up with lower monthly premiums but higher interest rates or longer payment periods but it will at least help you until you can get back on your feet.
The last and yet perhaps the most important tip is to erase your debt completely. Remember – the only credit you should have is from those you can still align under your income. You shouldn’t have any outstanding debt that is beyond your capability to pay.
The best way to achieve this is to use the first four tips listed above and then match them with a reliable budget manager. You could utilize computer software to calculate how you should budget your cash and credit or you could consult a financial advisor. The second option is often better because they can give you financial options on the spot.
Eliminating debt should be your end goal. By the time you retire, you shouldn’t have to pay mortgage or insurance plans. Everything should be paid and accounted for so that you can simply collect your retirement and enjoy the rest of your life.