The Bard of Avon himself, William Shakespeare, once wrote, “Neither a borrower nor a lender be”. While that advice may have made good sense back in Shakespeare’s time it’s not so helpful today in our world of plastic. Very few of us have the wherewithal to plunk down $30,000 cash for a car, $2000 for a washer-dryer combination or $3000 for granite countertops. As a result, we’ve had to become borrowers through student loans, bank loans, finance companies and those devilish credit cards. Whether we like it or not with debt comes the issue of debt management. Today it’s a lot more than just paying your debts. It’s often trying to walk a very fine line to make sure we’ll have more credit available when we need it. For that matter, the best way to manage debt is probably to begin debt management before you borrow any money. Beyond this, here are eight secrets of debt management you need to know.
Save before borrowing
This is not always possible but you need to try to build a money reserve or emergency fund to cover out-of-pocket expenses if you run into financial problems. While experts say you should have the equivalent of six months of your living expenses socked away in an emergency fund, a more reasonable amount might be three months’ worth. If you can’t put that amount into an emergency fund, try for at least $1000. This would be enough to cover an unexpected automobile repair, an airplane ticket home to see a sick parent or a leaky sink.
Know how much you will have to pay your creditors
One thing you definitely don’t want to do is borrow more money than you can afford to pay back. Track your money so you will know your monthly expenses. Subtract this from your take-home pay and this is how much you would have left to repay debts and stick something away into savings.
Shop before you borrow
One good way to think about borrowing money is that you’re “buying money”. This means you should treat it as if you were buying any big-ticket item. Comparison shop to make sure that you find the best money bargain you can whether it’s through a bank, a finance company or when applying for new credit card. Spoiler alert – one of the best “buying money” bargains available today is the 0% interest balance transfer card. Some of these offer 18 months’ interest free and at least one offers 22 months. That’s practically free money – assuming you pay off your balance before your promotional period ends.
Read the fine print
It’s the big print that makes the promises. When you see offers for “nothing down,” “low interest”, or “no-interest for 60 months,” don’t stop reading there. Read all the fine print that’s typically buried down at the bottom of the ad. You may find that there are fees and penalties that could mean big trouble if you find yourself in a financial pinch.
Have your own debt management plan in place
Another big mistake that many people make is to borrow money without first having their own debt management plan. That’s a sure way to lose control of things. And this is especially true of credit cards. Whenever you swipe one keep a record of what you purchased, the date of the purchase and a note as to how you plan to pay for the item. Credit card statements always include a minimum monthly payment but don’t fall for that. Credit card debt almost always has the highest interest rate of all. If you continue to make just the minimum monthly payments, you will very quickly fall into debt hell. Instead, pay as much as you can on that credit card debt to get it paid off as quickly as possible.
Prioritize your debts
There are two widely accepted methods for paying off debts. They are the snowball and avalanche methods. If you choose the snowball method, you will need to prioritize with the debt that has the lowest balance at the top down the one with the biggest balance. The avalanche method is just about the opposite of this is you would prioritize your debts with the one that has the highest interest rate at the top down the one with the lowest. It doesn’t matter which of these methods you choose so long as you choose one, prioritize your debts and then stay on track to repay them.
Know your rights
Just because you’re a debtor doesn’t mean you don’t have any rights. Our Federal Trade Commission (FTC) is an excellent resource with lots of advice about debt management as well as good information about what to do if you’re being harassed by a debt collector.
Comparison shop for advice
There are lots of books out there about personal finance, some of which are a lot better than others. Don’t read just one book or a few articles and then base your debt management on them. Comparison shop for your personal finance advice with the same care you would use when shopping for a big-ticket item.