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tips4me.com - managing debts

MANAGING DEBT

THE ‘GET OUT OF DEBT’ PLAN


Finding yourself in debt can be quite overwhelming and many of us have been in debt at some point or another. Debt often rears its ugly head in forms of credit card debt, a mortgage, home equity line of credit or student loan debt.

Getting yourself out of debt can be a daunting task. But with financial discipline, a little patience and the guidelines laid down below, you’ll be out of debt in no time.

Here’s what you need to do…
  • While you will focus on paying your debt down with most of your extra money, you can start a savings account at the same time.
  • At this time, recall why you got into debt in the first place. One reason might have been that an unexpected expense arose and you weren’t prepared. Having a savings account could have rescued you in that situation.
  • Making the savings account automatic will help you get back on the path to financial freedom without even thinking about it.
  • Setup a savings account that is linked to your checking account and have the money automatically deducted every month.
       
    THE WARNING SIGNS OF DEBT PROBLEMS


    Do you know the warning signs of too much debt? Don't allow yourself to be lulled into a false sense of security that you have your debt under control just because you're not late on any payments and you can manage the monthly minimums.

    Here are some of the warning signs that you have a debt problem.

    1. You don't have any savings.
    2. You make minimum payments on your credit cards.
    3. You use credit cards for things you used to buy with cash, such as groceries.
    4. You use increasing amounts of your total income to pay off debts.
    5. You have more than two or three major credit cards.
    6. After you pay your credit card bill, you increase your balance by the same amount (or more) the following month.
    7. You're at or near your credit limit on your credit cards.
    8. You count on the float in order to pay your bills, writing a check hoping that you'll be able to cover it by the time it clears your bank.
    9. You're unsure of the total amount you owe on all your debts.
    10. You take out cash advances on your credit card to pay other bills.
    11. You've tried to make a purchase with your credit card and been declined.
    12. You've been denied credit.
    13. You bounce checks.
    14. You get calls from collectors.
    15. You lie to your spouse or other family member about your spending or hide credit card statements from family members.

    If you realize that you are in over your head, the sooner you act, the easier it will be to get out from under the burden of debt. There's no easy fix, but it is possible to turn your finances around if you work at it.
     
    WHICH DEBT SHOULD YOU PAY-OFF FIRST


    If you have many debts to pay off, the ones you should be focusing on paying off first are the high-interest ones. Consider this: you might have two debts: one small and one big. The tendency would be to pay off the small one first. That’s the wrong way to look at it. Focus on which one has the higher interest rate. That should always be the order in which you pay-off debts. The other tendency one usually has is to put off the paying off of credit card debt. The notion is, well its going to build up again soon, so I might as well put it off for now. Wrong again. That’s because credit card interest rates are more often than not the highest in your list of debts. So never allow this to build up. In fact, do you know what is the rate of interest charged on your credit card? No? Then please check this up immediately.

     
    BORROWING WHEN INTEREST RATES ARE FALLING


    You never know what could be the interest rate in thefuture. If it is rising, you are better off borrowing at the lower rate today.But what if the interest rate is going to fall substantially in the future? InIndia, for instance, between 1996 and 1999, loan interest rates fell by 4 percent which brought down the cost of borrowing roughly by one-fourth the level ofwhat was three years before. Since it is not possible for you to predict thefuture check before borrowing whether your scheme gives you the freedom toforeclose, and if yes, then at what cost. This way, if in the future interestrates fall substantially, you can always approach another finance company,borrow at a lower rate of interest, and pay off the loan that bears a higherinterest burden.
     
    ARE YOU CAUGHT IN A DEBT TRAP?

    If whatever you are earning is being spent in repaying the debts, without giving you a chance to save and pay back the loan – then you are in a debt trap. In other words, there is no way you can come out of the debt without an additional source of income or a windfall. Then how do you come out of this debt trap? It is very difficult to do so, because, your morale would be already low and the pressures will be telling on you. But try these time proven techniques:

    A) Try to earn additional income by making use of your contacts and knowledge. In today’s Internet world, this is possible, if you can offer your services through the Internet. Use this additional income to retire some of your borrowings.

    B) Get additional borrowings at low cost and use these for retiring high cost borrowings.

    C) Structure your repayments in such a way that large portion of high cost borrowings get retired fast and low cost borrowings are retired by taking more breathing time.

    D) Cut down your costs and use the savings to repay the loans. This may mean living moderately and prudently.

    Remember that there are many, who became insolvent and yet came back with a vengeance to become rich. So, instead of getting demoralized, make a resolution to come out of the debt trap.
     


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