Accepting Responsibility and Learning to Handle Your Debt

March 14, 2009 by  
Filed under Debt Handling

Debt can become a very bothersome issue for anyone, and must be dealt with accordingly. Too many in trouble tend to ignore or downplay the fact they are in way over their heads, but it’s important to implement a debt management solution by being honest with yourself about your current situation.

First, you have to calculate or find your current balances owed, as well as monthly payment and interest costs. Unfortunately, too many people focus only on interest rates they are being charged. This is an important piece of information, but doesn’t mean much when compared to dollar costs that are easily put into perspective.

If you’re not sure how to calculate this amount, look at your most recent bill from your creditors. There should be an area showing your last payment, and the amount applied toward the principal and the interest. If you can’t find it, simply call the customer service line and ask them to calculate it for you.

Any debt management company will tell you that you shouldn’t be paying more than a few percentage points of your monthly take-home pay for interest charges. To calculate this number, divide your monthly interest costs by your monthly take-home pay.

For example, if you bring home $5,000 per month and pay $250 per month in interest to your outstanding debts, this accounts for 5% of your income. This means you are essentially throwing away $250 a month that you otherwise wouldn’t if you paid that debt off.

The problem with many debts, especially credit card debt, is that very little of even the minimum monthly payments is applied toward the principal of the balance. This allows the company to continue to make money on a larger principal balance for several years.

When planning your own credit card management plan, ensure you are always paying more than just the minimum amount due each month. This is because even if you only pay an extra $10 or $15, any amount over the minimum will be applied to the principal to pay it down. This drastically reduces your overall cost of the debt and shortens the amount of time needed to pay it back.

Being honest with yourself about your spending and borrowing habits is a huge part of developing your debt management program. Once you’ve decided to get a handle on your current situation and better your future, make the resolution to stop living above your means and learn to pay cash for everything. You’ll appreciate the things you do buy much more – or possibly find that you decide you don’t really want them that badly!

Design a budget that is both realistic and comfortable, but requires you to address your outstanding debt. Cut down on costs wherever possible, then apply these discretionary funds toward either your highest balance or highest interest rate first. This will dramatically reduce your payoff timeline, as well as save you thousands in interest in the long run.