An overwhelming amount of debt can be stressful. Financial shortcomings are already overwhelming, so increasing debt can cause an emotional strain. Today, debt issues have become more serious because of the COVID-19 pandemic, with many people resorting to borrowing and taking a loan to cover expenses.
An estimate of around 64% of Americans has reported that money is a significant source of stress. In addition, U.S. household debts surpassed $14.56 trillion dollars in the fourth quarter of 2020.
The key to minimizing debts involves the strategic management of budget and income.
Knowing how to manage money effectively is a simple way to assess how to significantly reduce debt. In fact, there are two kinds of debts, good and bad.
This article discusses ways of limiting and minimizing debts while identifying the good and bad ones.
What is a good debt? Is it possible that debt can be considered a good thing?
Well, good debts are when finances are managed effectively. It is something that leverages wealth and something that can handle unforeseen emergencies.
Examples of good debts are taking out a loan to help grow your business or investing in education to boost your net worth. Getting a loan to help you start with long-term investments like long-time investments like real estate is considered good debt.
Essentially, good debt can help an individual or business achieve their goals by creating more opportunities. However, it’s important to know that too much debt, even if for a good purpose, can turn into bad debt if left out of control.
Debt turns into bad when you can no longer manage it and only harms your financial situation more. Debts that come with exorbitant interest rates and are used for purchases that can lose value over time are considered bad debt.
Discretionary purchases like clothes, new cars, and new gadgets are examples of bad debts because they primarily benefit people in the short term. People can outgrow clothes, new cars cost more than second-hand cars, and the latest gadgets quickly become a thing of the past with new releases year after year.
However, one example that many people can relate to is credit card debt. Many people have the urge to spend money on various things without accounting for the money they have spent.
According to data, U.S. households had a credit card debt of roughly 43% in 2020. Additionally, the average credit card debt is around $5,111. This increased by 12% from the previous average of $5,835.
8 Tips to Limit and Minimize Your Debt
Managing debt and getting it under control is tricky, but not impossible. Here are some useful tips to help you handle debt.
Have a Monthly Budget
What are some of the ways people can avoid bad debts? A simple tip is to have a monthly budget. People can separate the things they need to account for and things they do not need.
Having money for loans, essential items, and other miscellaneous fees can prevent unnecessary debts. With the remaining amount of money, people can use it for investments or personal expenses.
By properly budgeting money, people can easily know where each of their expenses goes and how much to save for future purchases.
Create an Emergency Fund
An emergency fund can be a vital source of money for unforeseen circumstances. This fund should cover at least six months’ worth of income to help take care of expenses if anything happens, such as losing a job, having an injury, or an unpredicted necessary purchase like a trip to visit a family member.
Some people tend to disregard emergency funds as they think nothing will happen. It is better to have a fallback as unpredicted things can happen, and people need to be prepared just in case.
Separate the Wants and Needs
Flagship phones, new clothes, the latest smart accessories—these are unnecessary purchases that can wait until you have enough funds to buy them. Having a dedicated portion just for those wants is okay, but cutting down on those costs can be a major benefit in the long run.
The more you cut down on your personal budget, the better your finances will be. Instead of spending on your wants, you can allocate that amount to pay your debts. It is about being smart with the money and knowing where and when to spend it.
A tip for people who want to upgrade is to look for second-hand. An example would be a second-hand car. If you need a new car, it may be worth checking what kind of cars people are selling instead of official retailers. If the quality remains excellent and no damages are present, it is a viable choice to consider.
Keep Track of Expenses
A master sheet of expenses is an excellent way to regularly monitor all incoming and outgoing cash. You should update the master sheet each time you buy something or receive income, especially if multiple cards and accounts are involved for accurate tracking.
Seeing where the money goes lets you gauge how much you should save and how much to set aside for future funds. These future funds go back to the second point, the emergency funds. You can also set aside money for their savings if they plan to buy something in the future.
Try to Pay in Cash
It can be tempting to use a credit card instead of paper money when making several purchases but paying in cash is a tried-and-true way to avoid debt.
Expensive purchases such as jewelry, clothes, or appliances are difficult to pay off in cash. This is where a credit card can become useful, but for everyday purchases like food and water, paying in cash is recommended since it prevents the credit card balance from rising.
Increase Income Through Side Jobs
Earning money through a side hustle allows you to use those earnings as your personal savings or additional payment for your debt. These side hustles do not have to be intense jobs. Selling old clothes, furniture, or other miscellaneous items will suffice.
Additionally, getting a side hustle is a simple tip to pay off any loans faster while providing you the opportunity to increase emergency funds and retirement funds.
Consider the Fresh Start Initiative
What is the Fresh Start Initiative? It is a program that people can apply for to receive numerous tax relief options.
The program’s goal is to offer financial relief or resolve debts quickly for people who have large balances they cannot pay off immediately.
The Fresh Start Initiative allows people to pay off their debts over a finite period, making it easier to afford the payments. It also offers an option to remove tax liens or lower the total amount someone needs to pay.
It is best to consult with a tax professional before applying for this program since qualifying for these benefits can be difficult.
Look into Coupons
Getting some coupons is an easy way to budget expenses wisely. There are many coupons available for several purposes ranging from online streaming coupons, video game coupons, and subscription coupons.
Using coupons can significantly reduce your total amount, such as when purchasing groceries or other items that allow coupons. This lets you use the extra money for necessary expenses.
Nobody wants debts piling up every month. Organizing, spending, and saving is the key to minimizing these.
Remember, there are budgeting strategies you can do to reduce credit card debt and other forms of debt. Paying in cash and using coupons are straightforward alternatives that let people pay upfront.
Things like emergency funds and a side hustle act as a safeguard, providing more income for personal use or unforeseen circumstances.
Additionally, the Fresh Start Initiative is available if the accumulated debts are too high. Be sure to get in touch with a tax expert to make the process easier, especially since qualifying can be challenging.
In the end, it is still ideal to aim for zero-minimum debt. The lowest amount someone needs to pay for an outstanding balance.
Minimizing the use of the credit card and having the money to pay the balances are the simplest ways to avoid debt. It is about being intelligent and organized with money.