Staying atop financial obligations and finding ways to save money are two the biggest concerns facing most families. Ideally, cash flow balances within a household, with resources left over to stash for the future. Unfortunately, real world conditions are not always ideal. In reality, many families struggle just to keep up with ongoing expenses, much less reserving funds to use for personal savings. In fact, unexpected bills, rising costs of daily living, and other financial pressures actually make it impossible for some families to balance their accounts, instead relying on borrowing to bridge the gap.
When debt begins to accumulate, it can be difficult to break the cycle of borrowing. As each debt comes due, it adds strain to already tenuous financial conditions, keeping many modern consumers on a circular debt rotation. Although each case is unique, one thing is for sure: Continually adding new debt, without paying-down existing balances is an unsustainable approach to personal money management.
What do you do when debt pressure rises to unmanageable levels?
Fortunately, there are proven methods available for reducing debt, addressing the all too common problems people face when debt spirals out of control. The following examples represent only a few of the vetted strategies accessible to consumers committed to personal debt reduction.
Financial Planning Lays the Groundwork for Success
One of the reasons people find themselves in financial crisis is a basic lack of planning. After all, until you know where you stand, it is impossible to move forward, in the right direction. The first step to bringing down credit card balances and other outstanding debt obligations is evaluating your financial status.
In order to craft a workable plan, each debt and recurring expense must be accounted for. Start with major balances, including credit cards, store cards, car payment obligations, mortgages and other chief debts. Use the information to calculate a number, representing exactly how much you owe. This is the difficult part, which many people put-off, for fear of uncovering financially devastating circumstances. But though it may be a tough pill to swallow, this comprehensive look at personal debt is an essential step forward. On the other hand, some debtors are pleasantly surprised by the wide-angle financial review, highlighting conditions that are not as bad as they may have thought. Either way, the process gives you a starting point, from which to advance your next debt reduction moves.
Prioritized Payback Brings Balances Back In-Line
Just as you didn’t amass major debt overnight, reducing balances takes time. Working with your personal financial snapshot, identify which of your debts are the most expensive. High interest credit cards, mortgages with spendy rates and even student loans, at times, stand-out as heavyweights, draining your financial resources each month. The key to reducing overall debt is to erase the most costly examples from your debt-load, while keeping each of your creditors at bay.
In order to illuminate how payments impact cash flow, compare loans side by side. You may find that student loans, for example, can be deferred, as you instead use the money to tackle a credit card balance. Remember, the minimum monthly payment amounts suggested by credit card companies do nothing to erase your principle balance. Paying the minimum amount each month, with no additional contribution, will push you in the wrong direction, rather than pulling you out of debt. It would not make sense to pay ahead on a car loan or 4% APR mortgage, for instance, while your high interest credit card debt continues to grow.
Balanced Budgets Ease Further Distress
Temporary financial difficulties are commonplace, challenging families to keep up with payments. Unexpected repairs, medical bills and other costs are unrelenting, so most people run short, at one time or another. Although your financial fortunes may falter along the way, the key to long-term financial success is eliminating debts, before your cash flow becomes unmanageable. One useful tool used by successful money managers; budgets are the basis for ongoing money management, ensuring fleeting financial distress doesn’t grow into a more significant money problem.
In its most basic sense, a household budget accounts for cash flowing through your home. Income from your job and other monetary resources represent incoming funds, which are offset by spending. A balanced budget results when incoming cashflow approximates what is going out the door to creditors and other spending obligations. Budgeting is the worthwhile practice of aligning income and spending, so your outgoing expenditures are covered.
Breaking spending into several categories helps keep track of what you spend, and where. Once you’ve tracked buying for a few months, it is easy to recognize room for savings and craft a workable, balanced budget. By measuring spending, according to that which you can afford, additional resources may become free, to apply toward outstanding debt.
Minor financial setbacks are common and manageable. Long-term difficulties arise, however, when debt spirals beyond reasonable limits. When debt pressure becomes restrictive, reducing outstanding balances is the only path to prosperity. For fast relief, start moving in the right direction, with a well-conceived plan, accounting for every debt you owe. By prioritizing payback, you’ll clear the most expensive obligations first and then set your course for a balanced budget.
Guest Post by Derek Fisher. All opinions are his own.