Debt Management

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Debt Management

Debt management is a method to get your debt under control through financial planning and budgeting. It aims to use these strategies to help you lower your current debt and move toward eliminating it.

 One can create a debt management plan or go through credit counseling to help with your project. Both ways have advantages and disadvantages. Setting up a plan for yourself is the simplest way forward, but sometimes it can be helpful to have an outside partner providing help or accountability.

5 Principles of Debt Management

Here are five principles of debt management that will get you started on the right path and keep you there.

Understand your debt.

This is perhaps the most challenging section of debt management as it requires you to take an honest view of what you owe and make a list that includes:

  • Amounts owed
  • rates of interest
  • dates overdue
  • Any expiration dates

Make a budget
Once you know your amounts owed, you can create a realistic budget that you can follow. By doing this, you invest in yourself and your future.

Only pay for long-term purchases.
Sticking to your made budget will also help you avoid using a credit card to charge smaller items like groceries so that you can make it until the next paycheck. Remember that those groceries will be long gone before you pay them off.

Firstly, Pay off the debts with higher interest rates.
The best strategy is first to pay off the debts with the highest interest rates. This will save you lots of money. Instead of paying interest, you will be contributing money to paying the principle of the debt.

Don't be scared of negotiating and asking for help.
It doesn't hurt to acknowledge your credit card company when you need it. If you let them know, maybe They will delay your payment or provide you with a more convenient due date. Show them that you are a reliable consumer and are actively engaged in your debt repayment. Debt management takes tiny, strategic steps that help you work towards your aim. Trying to battle it all at once can overwhelm and discourage you, but you can make meaningful progress by following these simple debt management principles. So don't wait any longer to start paying down your debt and building a more secure financial future.


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What Are the Main Categories of Debt?

Secured debt 

  • The main types of personal debt, i.e., secured debt, unsecured debt, revolving debt, and mortgages.
  • Secured debt requires some form of security, while unsecured debt is wholly based on an individual's trustworthiness.
  • An example of unsecured revolving debt is a credit card, and an example of secured revolving debt is a home equity line of credit. 
  • Mortgages are home loans with 15- or 30-year terms, with the real estate as collateral.

Unsecured Debt
Unsecured debt lacks any security. When a lender forges a loan with no credit held as collateral, it only depends on trust in the borrower's capability and their promise to repay the loan. An agreement bounds the borrower in a contract to refund the owed money, and if there is a problem, the lender can go to court to reclaim any money owed. However, doing so comes at a much higher cost to the lender, and, for this reason, unsecured debt generally arrives with a higher interest rate. Examples of unsecured debt are credit cards, signature loans, gym membership contracts, and medical bills.

Revolving Debt
Revolving debt is an agreement between a lender and borrower that enables the borrower to regularly borrow an amount up to a maximum limit. A credit card is an example of revolving debt. Every credit card consists of a credit limit, and the consumer can spend any amount below the limit until the limit is reached. Payment amounts for revolving debt are based on the part of cash currently on loan. Revolving debt can sometimes be unsecured.

Mortgages are the most common and most considerable debt many consumers opt for. So basically, Mortgages are loans made to purchase houses, with the subject of the real estate serving as security. A mortgage has the lowest interest rate than any other consumer loan product, and the interest is often tax-deductible to certain people. Mortgage loans are most commonly issued at 15- or 30-year terms to keep monthly payments affordable for homeowners.

How Financial Advisors Can Help With Debt

Financial advisors can provide significant help in the management of debt. They're the professionals who help their clients get their finances in shape today and in the future. In addition, they may provide several services, such as investment management, income tax preparation, and estate planning.

Planning for a Budget
Managing debt is a crucial element of how a financial advisor can help you plan for a stable financial future. A person submerged in debt is like a person bleeding from an open wound. Thus, the first step is to stop the bleeding. A trusted advisor can list out a client's cash flow and identify existing and potential problems.
The client should bring all the relevant documents to the meeting to ensure that the advisor gets the whole picture. Documents include bank statements, credit card bills, installment loan statements, pay stubs, tax returns, and anything else that may impact your financial situation.
Some people might feel intrusive and hurtful to have a person they just met criticize their spending habits and past money decisions. However, for the meeting to be productive, clients should recognize that they might face some bitter truths.
Once the client gets past this problem, a new balanced budget is drafted by the financial advisor, which covers all the essentials while ensuring not adding more debt to the list. This typically involves cutting off any unnecessary expenses to make any excess funds available to pay down existing debt.

Examine and Redeveloping Debts
There are many different types of debt. Some are relatively agreeable, such as mortgages, with their low-interest rates and total tax deductibility. In contrast, others are downright toxic, such as credit cards with high-interest rates and delinquent accounts generating penalty fees on top of excessive interest. After examining the debt held by the client, the financial advisor can begin by prioritizing the client's debt payback tactics. The most expensive and troublesome accounts go on top, while the more modest ones go to the bottom.

Creating a long term strategy
The decision to meet with a financial advisor isn't necessarily related to helping the client pay off their debt as soon as possible. While the initial focus is debt reduction, other considerations often arise once the immediate problems are resolved. While each situation is different, the financial advisor has to take a holistic view to build a long-term plan suited to each client's specific needs.

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