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When you're struggling with debt, especially debt that you owe for multiple different reasons to multiple different creditors, it's easy to lose your handle on things. However, it's incredibly dangerous to lose your head when it comes to your finances, as you'll end up making costly mistakes with consequences that could hang around for a long, long time.
That said, you're only human, and you can't be expected to remember everything all of the time. If you're in deep with your debt, stay on top of your finances by keeping these seven tips in mind.
1. Some debts are good, but many are unnecessary
Usually, we think of debt in a negative light. Why wouldn't we? Debt, after all, is a burden that sticks around for a long time, siphoning away our financial resources through scheduled payments that can seem enormous and arbitrary.
Remember, though, that debt is not just a payment you make every month. Consider it an investment in something you wanted or needed yet didn't have the money in your pocket to get. When that something is worth having, then debt can be a good thing.
Student loans, for instance, are a "good" form of debt, at least in concept. You take on a sizeable amount of debt at the outset of your education to pay for your tuition and expenses, allowing you to afford to go to college and earn a degree. In purely economic terms, the bet is that the total debt you take on will pale in comparison to the higher salary you're able to command as a graduate. In other words, it's "good" debt because it pays off.
[caption id="attachment_21016" align="aligncenter" width="834"] Student loan debt has risen steadily in the US over the past decade, as shown in this chart produced by the Federal Reserve.[/caption]
However, much of the debt we take on is harmful and unnecessary when it comes down to it. Running up your credit card to buy luxury items such as expensive clothing and gadgets, or even to pad your grocery list, isn't going to pay off in the end.
This is all just to say that just because you're in debt, that doesn't automatically mean you should feel down on yourself. Most people are in some form of debt. Debt is a tool, and like any tool, what matters is how you use it.
2. Secured and unsecured debts are two different beasts
Not all debt is the same, and one of the biggest differences is between secured debt and unsecured debt. There's a world of difference between the two and, when you're struggling to keep up with your debts, you should approach them differently.
Unsecured debt relies on your creditworthiness. A lender looks at your credit score and other measures of creditworthiness to determine if it can trust you to pay back the money it gives you. If the lender feels like it can trust that you'll keep up with your payments and pay the money back, it will approve your application based purely on this speculation. The debt is "unsecured" in the sense that there's no security for the lender in these situations. That's not to say the lender has no recourse if you can't pay, as court action and wage garnishment are all too real for many debtors. However, these are legal last resorts, not consequences built into your agreement with the lender.
Secured debt, on the other hand, is tied to a specific piece of collateral, such as your house or car. That collateral acts as security for the lender. If you can't pay, it can seize this collateral to make at least some of its money back. If the lender isn't positive that you'll be able to pay back your debt, it will likely offer a secured loan for a bit of insurance.
The difference between secured and unsecured debt is vital to remember when you're struggling to make your debt payments on time. While in the perfect world you wouldn't be behind on any of your payments, the truth is that, sometimes, you have to decide which of your debts you're going to pay first in order to make ends meet. Most of the time, it makes sense to prioritize secured debts. After all, falling behind on an unsecured debt can be detrimental, but falling behind on a secured debt can lead to you losing your car or house, which would be much, much worse.
3. Budgeting is table stakes for getting out of debt
Many finance gurus sing the praises of making a personal budget, offering their own unique spin on the time-honored tradition of weighing your income against your expenses and finding places to cut back.
They're right to put so much emphasis on budgeting. A budget is the only effective way to get a handle on your financial picture and intelligently plan for the future. It forces you to assess your priorities and set limits while giving you the information you need to make smart decisions with your money.
Remember, though, that budgeting is just table stakes for getting serious about getting out of debt. It gets you started, but it's not going to move the needle much unless you have a strategy.
Many different strategies exist for getting out of debt, which we won't rehash here. In general, though, you should use your budget to figure out places where you can cut back and save money. You should take the money you save at the end of the month and strategically use it to pay off particular debts faster than you do others. In addition, if your projections still show that this won't really make much of a difference for paying down your debt, then take it as a sign you need to consider options that are more serious.
4. Saving and earning more is possible if you put your mind to it
One of the most boring pieces of advice you can give to someone in debt is to spend less and earn more. If you spend less, you can use more of your income to pay down debt. If you earn more, there's more income to go around. It's a no-brainer.
It's worth repeating, though, because many people don't actually take the advice seriously. They look for chances here and there to spend less and earn more without entertaining the thought of really changing things up in their lives. The real money, though, isn't in depriving yourself of a $5 latte once a week. It's in doing something big.
To spend less, think of what you can cut down on in your life that's helpful, yet unnecessary. Could you afford to move to a smaller apartment in a less trendy neighborhood? Could you start to bike to work and save yourself on gas and parking? How much would your grocery bill shrink if you stopped drinking or smoking cigarettes? Your biggest expenses aren't as much luxuries as much as they're lifestyle decisions.
Similarly, if you want to earn more, it's not just about trying to scrounge up extra hours.
- Pursue a new job you'd never quite considered before
- March into your boss's office and lay out the case for a promotion
- Consider a second job or a monetized hobby (If you already like to knit or make jewelry, take some time to figure out how to sell it online)
Making more money, after all, isn't just about finding more time to work. It's about making the time that you spend working more lucrative for you.
5. Tempting as it is, credit is the enemy
When you start to make real headway toward paying down your debts, you find yourself in a dangerous predicament. With more of your available credit freed up, your spending power suddenly increases. What's the harm in using a little bit of that newly available credit to make ends meet, or to treat yourself a bit?
The answer: There is a ton of harm in turning to credit when you're already struggling to get yourself out of debt. You're digging a deeper hole for yourself and making it exponentially harder to become debt-free.
Chances are that if you've run up so many different credit cards that your struggle to get out of debt has become life-defining, then you might have a difficult time controlling your spending. You've already shown a propensity for using credit to live outside of your means, and that inclination does not go away overnight. No matter how many times you say it's going to be different, it probably won't be.
That's why many credit counseling and debt relief programs actually require participants to cancel all of their credit cards at the outset. While canceling your cards all at once can do short-term damage to your credit score, it's also your best insurance against going deeper into debt. If you've been irresponsible with credit, consider taking this step.
6. Ignoring your creditors will likely do you harm
Nobody likes talking to creditors. Very rarely is it a pleasant experience, and if you're behind on your debt, it's not going to be much fun.
That said; it usually makes sense to communicate with your creditors, especially if you're having a hard time keeping up with your payments. More often than you'd think, your creditors will be willing to work with you in some way if you're struggling. They might let you skip some payments, enter into a payment plan, or even waive some accumulated things to make it easier for you to pay the debt. At the end of the day, they'd much rather have you pay something than have you pay nothing, and if you've shown a willingness to do that, they might cut you a deal.
In some situations, though, it can make sense to ignore your creditors. If you're going to file for bankruptcy, for instance, it's not going to do you much good to take your creditors' calls, since the court should soon be able to stop them from harassing you anyway. Some debt settlement companies will also discourage you from contacting your creditors, or will actually take calls for you to show that you're serious about pursuing settlement.
7. Debt consolidation can give you breathing room, but it's a means to an end
Debt consolidation is a process that takes all of your debts and consolidates them into a single monthly payment, often at a lower interest rate than you were paying before. This process enables you to pay off your debts faster than if you were just to try to keep up with your minimum monthly payments on your own.
There are many different forms of debt consolidation, but the most well-known form is the debt consolidation loan. You work with a lender to take out a personal loan that equals the total amount of your debt. You use that loan to pay off all of your debt at once and then focus your attention on paying down the loan.
For many people, this is where they think the debt consolidation process ends. They pay off their debts. They pay down the loan. Everything is great.
Unfortunately, it isn't. Many people who think like this end up deeply in debt again within a few years after securing their debt consolidation loan. They made the mistake of thinking that their problem went away, but that's not true. Debt consolidation gives you the wiggle room you need to address your problem, but it's only a means to an end.
To benefit from debt consolidation, you need to face up to the reasons you ran up so much debt in the first place. Was it irresponsible, impulsive spending? Was it a consistent effort to live beyond means? Was it an inability to prevent yourself from using credit? Whatever your problem was, you should use the breathing room that debt consolidation gives you to solve it. Otherwise, you'll likely end up struggling with debt again in the near future.
If you're interested in what debt consolidation can do for you, learn more about how National Debt Relief can help today. We're a leading debt consolidation company for a reason.