Introduction
With everything going on around the world, the rise of inflation and escalating food bills, rents and the cost of medical insurance, it is sometimes overwhelming to pay those bills all at once. In this article we are going to dive into a step-by-step guide on how to manage debts without affecting your mental health and where to seek assistance when you are faced with escalating debts.
You don’t have to get too worried or struggle alone trying to understand and work your debt out. All you can do is to seek help because anxiety can affect you when your monthly income is lower than your debt. Therefore, it is wise to seek help before the situation escalates more. In this article I strive to offer educative insights that can help you deal with and understand your financial situation and what you can do when you are in debt.
A debt is the total sum of money that we owe someone or an organisation and is now due. There are different types of debts, such as long-term and short-term debt, secured and unsecured debt, callable and non-callable debt, and fixed-rate and variable-rate debt. Before you get to understand the steps on how to manage debt, it is crucial to understand the types of debt.
- Secured and unsecured debt. Secured debt is a debt that is supported by collateral security. This is when you borrow money; you pledge a certain asset to say, ‘In case I fail to settle my payment, the lender can seize my asset.’ An example is when you borrow money from a bank to buy a car. The good thing about this debt is that it has lower interest rates. Unsecured debt is the total opposite of secured debt. With unsecured debt, you are given a loan; you do not need to have collateral. It involves a contractual agreement that binds the borrower and the lender.
- Callable and noncallable. A callable debt is based on corporate bonds. Under callable when you borrow money, the lender has the right to request for loan repayment before the due date. While the loan is noncallable, the lender only requests debt payment on the due date.
- Long term and short term: long-term debt is the one that goes for more than one year for repayment, while short-term debt matures in less than a year.
- Fixed and variable rate debit. These types of debts are shaped by interest rates. Fixed-rate debt has its interest rate fixed throughout. While variable rate debit has its interest rates fluctuating, they are determined by market forces.
Four steps to manage debt
The following are the steps that can help you, if done well, to set you debt-free.
Step 1: understand your debt
The first goal is to look into your debts and understand them. Debt can cause your anxiety, so you have to turn your anxiety into data. The goal is to face your fears, and once you have the courage, you start working on them. Once you are now aware of the nature of your debts, it’s now time to brainstorm how you will pay them.
On a spreadsheet or notebook, List down all your debts, including the following: how much you owe, the interest rate charged and due dates for every payment. You can use the table below to structure everything easily.
| Creditor | Bank Wallet | Interest Rate | Payment Due | Due Date |
From the list you create, identify the debts that you are able to pay fast, like those with low interest rates, and separate them from those that have high interest. Decide which debt to pay off first, either those with a higher interest rate or a low interest rate, and start to prioritise based on your decision. The goal is to reduce the burden.
Step 2: Work on a budget.
Working on creating a budget is another significant step when dealing with debt management. A budget simply gives you a tool for tracking your income and your expenses so that you get to have an overall understanding as to how your money is spent.
A budget is very important because it can help you reduce being worried about debts; through the right budgeting plan, you get to save a certain percentage of your income directed to paying debts while you get to plan what’s left.
Use this guide when using a budget for debt management:
Choose the best budgeting method that suits you and stick with it. Learn more about budgeting methods.
Use free online apps and resources to assist you with your budgeting journey.
Make sure you use realistic figures.
Set goals and prioritise them.
Prioritise settling debts which have higher interest rates because they have high consequences like legal action. For example, give priority to the following: rent, child maintenance, electrical bills and house taxes. This will give you room to cut high expenses. Set goals to say after three months I have not paid one or two debts fully.
Plan how to settle your debt.
Once your goals and priorities are set, it’s now time to start paying off your debt by either using what is called the avalanche and snowball method or combining both.
Snowball involves settling your smallest debt first, while avalanche is the opposite; it involves settling your highest debt first.
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Where to get debt management help
After following the above step and you are still struggling to manage your savings and be debt-free, you can use the following organisation:
Citizens Advice: It aims to give assistance to individuals with consumer and debt issues.
National Debtline: it is concerned with advising and offering resources to people struggling with debts.
StepChange Debt Charity: It offers online services and tools that offer to guide you with your debt problem.
Debt Advice Foundation: It advises individuals struggling with debts over the phone.
Summary
Being in debt sometimes is overwhelming, and it can drain you psychologically. Your monthly income is used to pay debt, and you are left with nothing to spend on yourself. By following the steps we discuss above, it can help you stay debt-free. Don’t allow debt to control you psychologically, but be in control of your financial life.