The best way to handle debt is to simply not carry any debt. If you have a steady job try to plan your budget in a way that you do not spend more than you make. In fact you should spend less than you make in order to provide for some slack income and some savings. In order to be able to handle unexpected events we should all have a cushion in the form of dollar savings in the bank that is liquid and risk free. The cushion should be enough in order to live for between six to twelve months or to pay for unexpected high expenses such as medical expenses. If the cushion is ever used you should make sure that it is replenished as soon as possible.
But sometimes there is no choice but to take debt. When taking debt you should be smart about it. One could assume that if a lender is willing to lend money it means that the borrower would be capable of paying it back. For years consumers took as much debt as they could assuming it is really the lender problem allowing for that debt. But in reality many lenders are not that responsible when evaluating debt or simply make mistakes. Do not rely on lenders to tell you if you can or can not afford a loan. Take a deep look at your finances and make the decision yourself. Make sure that the ratio between your debt and your income is reasonable. Also make sure that the debt terms are favorable in terms of interest rate and that the loan does not carry a pre payment payoff penalty.
Interest rates change often and as such long term loans should be alive and in your conscious all the time. It is smart to check every now and then if refinancing your debts is economical. If interest rates drop refinancing can save you a significant amount of money in interest payments over the term of the loan.
Some forms of debt should simply never be used. One of the most common forms of debt in the United States is credit card debt. The reason is simply that credit cards are the easiest forms of debt to be approved for and that realizing debt on your credit card is very simple. The only thing a consumer needs to do to accumulate debt on a credit card is to simply just pay the minimum credit card payment and leave the rest as debt. The problem with credit card debt is that it is too easy to use and that the terms of credit card debt are in almost all cases very bad. There is much cheaper debt that you can get which requires some more work and specific applications. While other debt is usually tied to a specific usage like buying a car or a home many people do not realize that you could go to your bank and apply for a credit line for debt that is simply cash you can use for anything.
Living Beyond Your Means
Developing a realistic budget is the first step to financial freedom. Notice I said realistic, I am not talking about a standard itemized budget here where you say I pay this much on the house and this much on the electric and so on. A budget that only includes your standard monthly expenses just is not realistic. Why not? Because you spend a lot more money than you think on things that you do not even consider in your budget.
When was the last time you sat down and worked out your budget? Did it look good on paper? Was it hard for you to figure out why you were broke when you should have $1,000 or more in expendable income each month? What is happening to that income? You are spending it without even realizing it.
In order to develop a realistic budget, I want you to do a couple of things. Take out a sheet of paper or open a spreadsheet. Enter your standard monthly expenses such as your house payment, car payment, utility bills, insurance bills, credit card payments, etc. Do not forget extras such as groceries and gasoline. While you are at it, take a stab at how much you are spending in entertainment and impulse purchases. Now put everything away and do not look at it for a month.
What you are going to look at for a month is a spending journal. Go purchase an inexpensive notebook. Each time you make a purchase, no matter how small, record it in the notebook. I am talking about everything here: coffee, lunches, dinners out, money that you hand over to the kids, etc. Write down the date you spent the money, how much you spent and describe what you bought.
At the end of the month, bring out your standard budget and your journal and compare them. I bet you spent a lot more money than you had budgeted for, did you? It is amazing how things that you do not even consider add up. Just think: If you buy a $2 coffee every morning on your way to work, you would spend $40 a month on coffee. And that is not including the occasional donut that you sneak here and there.
Now it is time to get realistic. The key to formulating an accurate budget is to merge these two budgets. Take a look at what you really spend and figure out where you can cut costs. Maybe you could purchase a self-timed coffee pot and grab a cup before you leave the house. Maybe you could let the kids rent movies and have their friends over rather than go out to the theater. Do not be afraid to get creative.
Keep in mind that you can only budget and save where it is reasonable. Do not try to do away with items that you do not want to live without. Instead, shave away expenses. Instead of eating out twice a week, why not try twice a month? Instead of doing away with cable completely, why not scale back on subscription channels? You get the idea.
The key to developing a realistic budget is to be honest and reasonable. Be sure to include all of your expenses, even the ones that are easy to forget about.
Both Hilary Skinner & Jay Delgado are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Hilary Skinner has sinced written about articles on various topics from Credit Cards, Careers and Job Hunting and Finances. Hilary Skinner writes at have a happy life with a good sound health « bad credit unsecured loans genie. Hilary Skinner's top article generates over 27100 views. Bookmark Hilary Skinner to your Favourites.
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