The global debt-to-GDP ratio reached 322% by the end of 2019, a record high that outstripped that of 2016, which was one of the worst years for debt on record. Debts are everywhere and nearly unavoidable for everybody. They differ in terms of size, interest rates, and pay-by dates. With the often fickle nature of finance management, this can lead to some unexpected difficulties when it comes to staying on top of your debts.
That’s especially true for entrepreneurs, who are often pulled into outrageous amounts of debt trying to keep their businesses afloat. Whether you’re self-employed or a W-2 worker, however, being even ankle-deep in the quagmire of debt is nothing to scoff at. So, here are four tips to help you stay fully above it.
Arrange Plans of Action and Contingencies
Perhaps the most important way to make sure you stay on top of your debts is to formulate a reliable plan of action that works best for your financial situation. In addition, make a few variations of that plan to follow in case it doesn’t work out. A solid plan is well and good, but due prudence includes making backup plans and contingencies that will help keep you from getting buried in debt.
An example of such contingencies is taking out bad credit loans to pay off high-interest loans, because such loans usually need to be paid as soon as possible. Everyone’s various financial situations can make debt-paying plans vary wildly from one person to the next, but there are a few solid guidelines to follow that would fit most people. One of them is to set aside a portion from each income cycle to work towards paying off a debt. Some banks have auto-paying services, making them well-suited for this task.
Another is to employ psychological tactics such as the “snowball method” which involves paying off the smaller debts to build motivation to pay off the larger ones. Whatever ideas you come up with, it’s important that you remember that your primary goal is to pay as much debt as soon as possible, to save you from getting overwhelmed later on.
Make Projections on Payables Before Entering Debt
Whether you’re in debt or on the verge of acquiring new debt, it’s important to take a step back and assess how much of a strain becoming indebted will put on your finances. Before taking out a new loan or making a new purchase on credit, keep interest rates and monthly payables in mind, so you won’t be surprised later on. This extends to choosing loaners and credit card companies as well. It’s important that you know the rates, so you can better make projections and know just how much you’ll be paying each cycle and for how long.
Once you’re aware of the interest rate, you can start taking stock of all current and future debts to obtain a tangible “total debt” figure. Whether you plan on consolidating your debt, doing this tells you how much of your income is disposable and how much you need to set aside each month to ensure that each debt gets paid promptly. Knowing that leads to prompt payments, better credit scores, and a smaller likelihood of getting buried by debt.
Get a Solid Handle on Your Income and Expenses
This mainly involves making sure that your savings are in order and your income stream isn’t altered. As a regular employee or a contractor, this shouldn’t be too hard, as your payments are usually sent to you automatically. However, if you’re self-employed or otherwise paid on commission, it would be wise to find some way to remind you of any invoices you may have forgotten to send. If you can afford it, hiring professionals to manage your receivables is a great way to save time and effort on the matter. Doing this will let you focus more on your work and other pursuits.
Once you have control over money management with a regular income coming in, start paying attention to money coming out. Researchers from the Joint Center for Housing Studies at Harvard University discovered that people are far more likely to become indebted when there are significant drains on their savings. This can come from things like unnecessary fees and items that need frequent maintenance, but mostly it comes from a person’s lifestyle choices. According to the Harvard researchers, people who spend over half of their monthly paycheck on living expenses are forced to forego important necessities like healthcare, forcing them to go into debt when the need for large sums arises.
Considering this, ensure that your household is spending at maximum efficiency and cut down unnecessary costs. Before charging items to your credit card, make sure you can afford to pay it in full with the money in your account first if you so chose. Furthermore, you should also familiarize yourself with all the extra fees your card company and moneylenders may exact, so you can avoid those inconveniences as well. Loaning wisely and using credit cards conservatively also works wonders for your credit score, which can open up a wealth of financial options.
Keep an Eye Out for Anything That Might Help, However Small
Finally, gathering up anything that might help you towards eliminating your debt is a fantastic supplementary measure. For credit card holders, this usually involves some sort of points or rewards system that the company might have. This also extends to cashback rewards, such as those some companies give for on-time payments. This ties back into the more prudent usage of credit cards discussed in the previous tip.
Applying for points and cashback rewards are a great alternative to paying with cash once you’ve accumulated enough of them. If you prudently collect points and rewards, you can use them to pay for things you usually buy with cash. This will lead to a significant boost in your savings every once in a while.
Perhaps now more than ever, debt is as much a part of our lives as our paychecks may be. While it’s difficult to avoid the risk of debt, a little financial preparedness can go a long way with staying on top of it, and these four tips can help you achieve just that.
