Debt is an almost unavoidable part of life, and it doesn’t necessarily have to be a negative. Borrowing money may facilitate things like starting a business, or getting a further education. However, there are times where debt can become overwhelming. In this guide, we’re exploring the best methods of managing debt.
We’ll also look into the differences between so-called “good debt” and “bad debt” and ways that people can use debt to move forward in life, as well as some finance basics that can help you with your steps to financial freedom.
Understanding All Types of Debt
Before we go into debt management strategies and the top ways to manage debt, it helps to understand the types of debt, and why debt can be such a big problem for people. Debt can escalate if you don’t manage it, and if you make poor decisions about money.
Understanding the Difference Between Good Debt and Bad Debt
You need to understand the difference between good debt and bad debt, which is one of the finance basics that everyone needs to get their head around. Most people need to borrow at some stage in life. In the third quarter of 2022, an Experian study found that the average American held $101,915 in debt. This becomes a problem when there is a higher proportion of bad debt than good debt.
Good Debt
Good debt is somewhat subjective, but these terms are designed to be general, “good” and “bad” are subjective terms. Good debt is usually defined as something that is constructive, and that has a better future in mind, such as education or something to improve finances long-term.
Investment in Education
Taking on student loans to invest in education can be considered good debt. Education is an investment in future earning potential, career opportunities, and personal development.
Investment Property or a Mortgage
Mortgage debt, especially for a primary residence or an income-generating property, can be seen as an investment in real estate. Real estate has the potential to appreciate over time, providing long-term financial benefits. Plus, it could potentially be cheaper than renting.
Business Loans for Starting or Expanding a Business
Of course, this depends on success, so there is a big risk in even some of the “good debts”. Debt incurred to start or expand a business can be considered good debt if it leads to increased income, business growth, and potential profitability.
Bad Debt
Now let’s look at some of the “bad debts” which people can’t always avoid, but they can be some of the worst types of debt to manage and to be saddled with.
High-Interest Credit Card Debt
Accumulating credit card debt with high-interest rates for non-essential expenses can be considered bad debt. The high-interest charges can quickly lead to financial strain.
Loans for Luxury Cars
Taking out loans for assets that depreciate quickly, such as high-end cars, can be considered bad debt as the value of the asset declines over time. If you need to sell, you'll likely lose money.
Payday Loans with High-Interest Rates
Payday loans, known for their extremely high-interest rates, are considered bad debt due to the exorbitant costs and potential for trapping individuals in a cycle of debt.
It is worth explaining that not everybody can avoid these types of debt, and though they may be called “bad” this doesn’t really help when it comes to managing finances. You may have borrowed money at a time where you were earning more, and unexpected events have left you in financial trouble. The key is that clearing bad debts (without neglecting good debts) should be the priority. This is one of the top debt management tips.
How to Manage Your Debt
Now that we understand a little bit more about the types of debt, we can start to explore tips for managing debt and begin on the route to financial freedom. It can feel intimidating, but there are options for people who are in debit.
1. Comprehensive Debt Assessment
Begin by conducting a thorough assessment of your debts, which can also form part of your budgeting. Create a detailed list that includes each creditor, outstanding balance, interest rate, and minimum monthly payment. This detailed overview serves as the foundation for effective debt management, and you may choose to work with a financial planner or debt management planner.
2. Prioritize High-Interest Debts and “Bad Debts”
Identify debts with the highest interest rates and prioritize their repayment. Focusing on high-interest debts first can significantly reduce overall interest payments and accelerate your journey to becoming debt-free.
3. Develop a Realistic Budget
Create a detailed budget that outlines your monthly income, fixed expenses, variable expenses, and debt repayment. A realistic budget not only helps you allocate funds for debt reduction but also provides a clear understanding of your financial situation and helps you to work toward your goals.
4. Cut Your Expenses Whenever Possible
Evaluate your discretionary spending and identify areas where you can cut back. Redirecting funds from non-essential expenses toward debt repayment can expedite the process of reducing outstanding balances.
5. Negotiate Interest Rates
Explore the possibility of negotiating lower interest rates with banks and anyone who you owe money. Contact them directly to discuss your situation, emphasizing your commitment to repaying the debt. Lower interest rates can significantly help with debt management, and your debt burden.
6. Debt Consolidation Consideration
Investigate the option of debt consolidation, especially if you have multiple high-interest debts. Consolidating debts into a single loan with a lower interest rate can simplify repayment and potentially reduce overall interest costs. You may want to talk to a professional such as online finance tutor who can help you to work out whether this might be a worthwhile activity and could save you money in the long run.
7. Establish an Emergency Fund
This is a tip for all financial management guides, and something that can help anyone on their steps to find financial freedom in the future. Allocate a portion of your budget to building an emergency fund. This fund serves as a financial safety net, preventing the need to rely on credit in case of unexpected expenses and avoiding the accumulation of even more debt. It isn’t easy to find the money to create an emergency fund, but you need to think where the money is coming from if your car breaks down.
8. Regular Monitoring and Adjustments
Continuously monitor your progress in repaying debts and make adjustments to your plan as needed, so if you find you have more to devote to your debt repayments (or less) then you can make these changes. Life circumstances may change, and your financial strategy should be flexible enough to accommodate unexpected events or fluctuations in income.
9. Seek Professional Guidance
If your debt situation is complex or challenging, consider seeking advice from a financial counselor or debt management professional. They can provide tailored strategies, negotiate with creditors on your behalf, and help you develop a realistic plan for debt elimination. People might think that they can’t afford it. How much does a financial advisor cost? Well, it depends what help you are looking for and where you look. However, you may not need a financial advisor so much as finance tutors online, which can provide you with somebody to help plan your financial future and create a debt management plan.
Consider enrolling in financial classes near me to expand your knowledge and skills in managing your finances effectively. These classes will cover a wide range of topics, including budgeting, saving, investing, and retirement planning, providing you with valuable insights and practical tools to achieve your financial goals and secure your financial future.
10. Keep Learning About Finance
One of the reasons people struggle with their debt is that they don’t know how to manage debt effectively. Whether you are taking a personal finance class or studying with an online finance tutor, you should look to grow your knowledge in order to implement a debt management program that can help you to pay what you owe and end up in a much stronger position.
Knowing how to learn about finance can be tough, but there are some YouTubers out there as well as authors who provide an interesting insight into the basics of finance. It can be a worthy investment to take finance tips onboard.
Get Out of Debt with Superprof
Getting out of debt is rarely an easy ride. Short of a lottery win or similar windfall, getting out of debt requires a debt management plan and can take years, but it can set you on the path to a much brighter financial future. For this reason, it is well worth putting in the hard work.
Of course, pay raises along the way can help, but generally speaking, the way you manage your money is going to play a huge role in your debt management, and financial tutors can help you to understand your money better and start the journey out of debt. Here at Superprof, we have many financial online classes and tutors ready to help you create a plan for your future and improve your financial situation. Take action and plan for your financial success with the help of a Superprof finance tutor today!
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