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According to Nerdwallet, the average debt of an American household is at approximately $200,000. This is a combination of mortgage, credit card and student loan debts. That is definitely, a huge amount of debt for one household to carry. Imagine how long it will take for you to finish paying off that big debt? You will probably be about to retire and you still have yet to reach the maturity date of all your debts.
Probably what is worse that having all these debts per household is the fact that it has become the norm in American consumers. Big debt is a terrible thing for a family to share and for your children to grow up in. But since a lot of people have it, this terrible thing becomes something that is acceptable. Instead of working hard to get rid of it, we accept our fate and just live day by day with huge credit balances over our heads.
There are three important strategies that you need to work on separately to deal with your big debt.
- Pay off your existing debts aggressively.
- Know how to avoid incurring huge debts.
- Manage your budget carefully.
How to pay off your huge debts aggressively
Regardless of how much you owe or the reasons behind your loan accounts, you need to start paying off your debts more aggressively. Fortunately for you, there are several ways for you to do just that. Here are a couple of them.
- Do not run from the problem. Looking at a big debt is scary. It shows you the reality of how much you have failed when it comes to managing your finances. However, we all know that ignoring the balance that you owe will never solve anything. It will never give you the peace of mind that you deserve. So the first thing that you need to do before you can aggressively tackle your debts is to face it and look at how much you really owe.
- Pinpoint the cause of the problem. The next thing that you need to do, after facing your debts, is to find out what caused you to be in debt in the first place. Was it living beyond your means? Or was it because you did not have an emergency fund? Sometimes, a big debt is not caused by being irresponsible with money. There are times when you are in debt because you were simply not prepared for an emergency. One serious illness can put your stable finances over the edge and into a huge debt. Knowing the cause of your debts will allow you to bring about the change that will turn your financial life around.
- Choose a debt relief plan. There are so many debt solutions out there. If you know your debt situation and your capabilities to pay off your credit, it should be easy for you to choose a solution to your money problems. You have debt consolidation loans, debt management, credit counseling, debt settlement, debt consolidation and even bankruptcy. The important thing is you should choose a plan that you will follow. That way, you will have more focus and direction as you pay off your big debt accounts.
- Set up automatic payments. This is one way for you to make sure that your payments will always be met. Aside from setting aside a specific amount for debt payments on your budget, you may want to set up an automatic transfer with your lenders. Sometimes, they offer interest rate discounts if this will be your chosen mode of payment.
Tips to stay out of too much debt
As you work on aggressively paying off your debts, you need to simultaneously work harder to stay out of debt. Here are some tips that you may want to look into.
- Stop incurring high interest debts. This is actually referring to credit card debt. This is the easiest debt to fall into and the hardest to get out of. If you still have big debts to pay off, it is better to stop adding to your balance - at least until you have lowered your overall debt amount. Fixed rate credit cards, according to Bankrate, is currently at 13.02%. That is the average. Some banks have as high as 20% on their credit card interest rates. Think about how much money you are wasting by paying these huge interest rates.
- Monitor your accounts. It is important that you always look at your accounts. This is does not only mean your budget. You need to constantly check your automatic payments to ensure that it is meeting the contribution requirements. You should also check your credit report. Sometimes, people suffer from a big debt burden - not because they spent on credit, but because they had been victims of identity theft. You need to be vigilant about this and guard your credit report. If a transaction comes up that you did not take part in, report it immediately.
- Setup spending rules and punish yourself if you disobey anything. Lastly, you may want to set some rules that will keep you from spending beyond your means. Be strict about what is a necessity and what is a luxury. Once you have set the rules, you may want to note the punishment that you will impose on yourself for disobeying any of them. That should discourage you from going against your rules.
- Build up your reserve fund. According to Investopedia.com, this fund will help you meet unexpected costs. Sometimes, these unforeseen expenses are the ones that can really drag your finances down. So just set aside even a s small amount of money and consistently put that in your reserve fund.
Manage your budget better
The last thing that you need to do in order to deal with your big debt once and for all is to manage your budget better. You may want to try to simplify your financial life so you can be a better money manager. Here are a few tips to help you do this.
- Use technology to your advantage. There are so many personal finance tools on the Internet. You may want to utilize one of two of them to make budget monitoring easier to do. With all the capabilities of your smartphone, you can easily look at how your money is doing.
- Keep your budget updated. Our expenses vary over time. This is a fact. As we get older, our priorities change and that includes where our money is spent too. You need to constantly check you budget to see if it is still aligned with your current financial goals.
- Budget for the fun things. People make the mistake of leaving entertainment expenses out of the budget. This is wrong. We need to budget for these costs because we need to have fun every now and then. If you limit yourself, there might come a time when you become so frustrated that you throw caution out the window and splurge your money. You do not want that to happen.
While the big debt that you have is daunting, following all of the tips in this article should be able to help you pay them all off. It is admittedly not an easy task but if you exert some self control and have the right habits, then you can rise up from your difficult financial situation.