If you feel you don’t have a really good grip on personal finance, don’t feel bad. Sixty-one percent of all Americans admit they don’t fully understand personal finance and they especially don’t understand debt. One recent survey found that a majority of American adults (61 percent) couldn’t correctly answer more than three of five fundamental financial literacy questions. That’s up from 58 percent in 2009.
Doing a better job of managing your debt is not that difficult. All you really need is to understand these fundamentals of debt management.
Figure out why you’re in trouble
There’s the old saying that insanity is doing the same thing over and over but expecting a different outcome. No, we’re not implying you’re crazy. But you do need to sit down, take a hard look at your debt and determine what got you into trouble then stop doing whatever it was, We recognize that some people end up in big debt through no fault of their own. They had a serious medical emergency, lost their job or had a bad divorce. But for the overwhelming majority of people drowning in debt it’s because of their behaviors. The harsh fact is that they just misused their credit.
You probably wouldn’t start out on a 1000-mile car trip without first making a plan. The same is true of managing your debt. It’s not enough to just say, Okay, I’m going to start paying off my debt.” You need to make a plan. However, before you make a plan you need to determine how much money you will have available to pay down your debt. This means making a list of all of your expenses and then dividing them into two categories – fixed and variable. Your fixed expenses would be things such as your rent or mortgage payment, your auto loan, insurance and utility bill. Variable expenses are things like clothing, dining out, entertainment and food. Add up both these categories and subtract the total from your monthly earnings. This will tell you how much money you have to pay down your debts. If you find you don’t have very much money or, horrors, you’re spending more than you earn, you’ll need to revisit that list of variable expenses and look for places where you can make cuts. If you find you have $100 or can free up at least that much to work on
Pick a plan
Back to that thing about making a plan. There are two proven ways to pay off debt – snowballing or stacking. Snowballing is where you list your debts in order from the one with the smallest balance down the one with the highest and then focus all of your efforts on paying off the one with the smallest balance. The idea behind this is that you should be able to get that debt paid off pretty quickly, which will give you momentum to start paying off the next debt and so forth. Of course, while you’re working on that first debt don’t forget to make at least the minimum payments on your other debts.
Stacking debts is where you order them from the one with the highest interest rate down to the one with the lowest. Then you do the same thing – focus all of your efforts on paying off the debt with the highest interest rate. The people who promote stacking debts say it’s better because it will save you the most money. Those, including the financial expert Dave Ramsey, that champion snowballing say it’s better because you will get your debts paid off faster than if you used stacking.
A third way to tackle your debts is to just pick one and pay it off even if it takes a month or two. Then choose a second one and go to work on it. It really doesn’t matter which system you choose so long as you pick one and stick to it.
Get a debt management coach
If your debts are such that you absolutely can’t see any way to pay them off – using any system – maybe you need a coach. Professional athletes always have coaches, whether it’s a tennis coach, a wide receivers coach or a batting coach. The best and cheapest way to get a debt management coach is to go to a consumer credit counseling agency. If there’s not one where you live you can easily find one on the Internet. The important thing is to choose one that’s honest and reputable. The best test for this is if the agency belongs to the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies (AICCCA). The members of these associations must adhere to strict high-quality service standards. So if the counseling agency you’re considering does belong to one of these organizations you can expect to be treated honestly and fairly.
The help you need
When you sign up with one of these credit-counseling agencies you will have a counselor that will review all of your finances and help you develop a plan for getting your debts paid off. That just might be the kind of coaching help you need to better manage your debts and ultimately get them paid off.