Having debt can cause anxiety and stress. According to the National Center for Biotechnology Information, studies reveal that debt causes more anxiety than other factors like income, employment, education, and wealth. For this reason, as much as possible, everybody wants to avoid incurring debts.
To do decrease debts or avoid them totally, you need to follow these ways to handle your financial resources more effectively:
Decreasing Debt
There are some steps to help you pay and reduce your debts for those who already have debts. This includes prioritizing payments, consolidating debts, and finding ways to increase your source of income. Here’s a more in-depth look at each
Prioritizing Payments
For debts with high-interest rates, pay as high and as fast as you can. The key is paying debts with the highest interest rates to the lowest. You can prioritize debts with lower rates last. But that does not mean you can ignore payments; it simply means paying the minimum for these debts.
Continue with this system until you have paid all your debts. By doing so, you avoid paying more interest. Interest can be a hassle that adds to more debts. While on the topic of lowering interest rates, mortgage refinancing can help too.
Debt Consolidation
Most often confuse refinancing with consolidation. However, refinancing involves replacing a single debt with a new one with preferably lower interest rates. Debt consolidation, on the other hand, means combining several debts into one loan.
Like refinancing, debt consolidation might give lower interest rates. Moreover, combining debts into one monthly payment eliminates the confusion in making payments.
Using Savings
To pay for high-interest rate dates, you can use some of your savings. Using cash on hand is wiser than acquiring more debts due to interest rates and large balances. Letting your money sit in your bank account while your debt payments are expanding is not the most practical way to do it.
Using Tax Refunds
Instead of splurging your tax refunds on your vacation or expensive items, it’s wiser to use them for paying off debts. It’s better to pay your debts as soon as you can so when you make your next purchases, you don’t feel guilty. At the same time, paying your debts as soon as possible eliminates your monthly worries and stress.
Converting Items to Cash
Many people have items just sitting in their rooms and not being used. You might find no use for these items, but don’t throw them out just yet. Some people might find these items valuable, and you can earn some extra cash, too.
Nowadays, it’s easy to sell items through Craigslist or eBay. You can even hold a garage sale too. Collect the cash from selling your pre-loved items and put it in your debt payments.
Cashing in Life Insurance
Though not the most ideal, you can do this to pay large debts with hefty interest rates quickly. One can choose this strategy, especially if you do not have dependents that will benefit from the policy. This strategy might just be the key to saving you from totally drowning in debts.
Ways to Avoid Debt
The best way to avoid debt is to allocate the money that you have properly. NBC News says to follow the 50-20-30 rule to manage finances wisely. This rule means that one needs to put fifty percent of your money to needs, thirty to wants, and the rest for savings.
Needs include monthly payments for utility bills, debt mortgage, and other essentials like food and transportation. On the other hand, Wants might include dining in fancier restaurants or going to theaters to watch a movie. Savings might consist of the cash you put into your bank account or your investment.
By adequately allocating your money, you reduce the chances of spending money on unnecessary things outside your budget. Additionally, it allows you to save some money that you can use for emergencies, like medical emergencies. As reported by CNBC, a medical emergency is the main reason why most Americans are in debt.
The Right Way to Save
To avoid borrowing money and incurring debt, saving for a rainy day is important. However, some fail to save because they do not plan realistically. Hence, it is essential to plan what you can save realistically to set yourself up for success.
As an example, the 50-30-20 rule might not always work for everybody. Those with high debt or expenses might need to follow the 80-10-10 rule, with 80 percent going to payments. Additionally, you temporarily cut out spending for unnecessary things until you pay off all your debts.
You don’t have to worry about debts if you don’t have debts. It is a given that sometimes, life throws unexpected circumstances that might lead you to acquire debts. However, you can always prepare for these circumstances; having smart saving goals is one step.