People who have a lot of debt often take a “why bother?” attitude about money management. They’re in so deep that practicing good money management behavior just seems fruitless.
But that’s wrong and it’s hurting a lot more people than most people realize. About 80 percent of Americans have some kind of debt and a whopping 20 percent have absolutely no debt payoff plan in place. Nothing. And when it comes to medical debt, Americans are in even worse shape: well over a third of Americans are tossing their cares to the wind and letting those doctors’ bills just pile up.
Again, there’s no action plan in sight. Outta sight, outta mind?
Actually, no. There’s a solution for every type of debt (even the worst types). You just have to find the one that’s right for you.
Here’s your guide for doing just that: planning a roadmap for reducing and removing your debt. Spending the next seven minutes reading this guide could change the rest of your (financial) life.
The first thing to know is that debt can wear many clothes. From the school loan you took out to the Visa bill you racked up on last year’s trip to Bali, there’s a hierarchy of debt from good to bad. This is important to understand because it’s going to help you later on when you start building out your action plan.
Basically, debt can be categorized based on how urgent it is to pay it off quickly. The sense of urgency stems from high interest rates. Many of the so-called “good” types of debt have very low interest rates compared to those of the “bad” and “ugly” types of debt.
Lots of times, debt is useful — like a business loan that helps you start a new career (or grow the one you have). And debt can be used to get access to life-saving medical care. In some cases, people even use one kind of debt to pay off another type of debt.
You’ll want to choose your method for chipping away at that debt:
Sometimes, debt consolidation is a good idea. One of the beauties of using a personal loan to consolidate your debt. It won’t hurt your credit score because lenders don’t do a hard pull on your credit history. It’s important to always monitor and even try to improve your score so that it benefits you the most when the time comes that you might need a loan. It isn’t a quick process, and something to keep working on. Otherwise, you might find yourself with few options than high interest rates when you need to borrow and stuck trying to get approved with bad credit.
Lots of people use personal loans to consolidate their debt. Personal loans let you lump all your different balances together into one payment that’s much easier to handle. Beyond that, there are several other good reasons to consider a personal loan for debt consolidation:
There is, however, one instance when debt consolidation might not be the answer. While it’s possible to get a personal loan when you have bad credit, make sure you look at what your rate will be. First, figure what combined average rate you’re currently paying on all your loans. If your consolidation plan results in substantially higher rates than the figure you came up with, then it might not be worth the convenience of one monthly payment.
If you’re ever going to be able to save money and start accumulating a little nest egg for yourself and/or your family, you’ll have to think about budgeting. Even right now, when your goal is to reduce or remove your debt, it’s essential that you examine your spending. The golden rule of good money management (only way to make progress against both of those goals) is to spend less than you earn.
While you’re at it, consider adding an emergency fund to your list of financial things to do. This will help you stay out of debt. When the dishwasher starts flooding your kitchen or somebody gets their hours cut at work, you’ll have a cushion of cash to fall back on.
In closing, here’s some advice on how to avoid mistakes in your debt reduction journey.
No matter what, you’ll always owe that money. Even if you simplify your life by taking out a personal loan, you’re not reducing the amount you owe until you’re actually paying it down with cold, hard cash. Follow a sound plan, keep at it, and you’ll soon be on the road to financial health.