Maintaining an “out of debt” way of thinking will allow you to be more conscious about managing your finances the right way.
If you concentrate on staying away from debts and financial troubles, you will have a better chance of attaining financial freedom.
Many financial counselors advise clients to stay away from debts and maintain a debt-free life. Although this is a very common goal to many, it is practically not always attainable. Now and then, you will need to spend for something, especially for emergency situations which could often lead to debts.
What Face do Your Debts Have?
What many people do not know is that there are two kinds of debts – there’s the good and the bad ones. The good debts are those that you can easily manage, and those that are bad would be those that you cannot control or they don’t have real value. If you are able to afford your expenses and debts such as your home loan or car loan, then you will have no problem dealing with the financial consequences. However, if you are unable to afford or handle these loans then you may have a huge problem ahead of you.
However, when talking about credit cards, all debt in this category is considered bad debt. There is always going to be a limit to where you won’t be able to afford them any longer. This is a given principle if you over use cards.
However, such debts can always be managed by constantly paying off the debts. A good way to start is to settle loans which have the higher-interest rates, since these loans usually build up debts faster due to the elevated rates. Although it may hurt financially in the beginning, it actually will show impressive results in the long run.
Understanding the Next Step
As soon as you’ve settled your personal loans along with your credit card loans, you can also move to paying off your student loans or auto loans. In this regard, it is best to pay off those with the lowest balance first, to allow you to concentrate on those debts on your list that really needs some focus. Should you come across debts with almost the same rates and balances, consider that which has a higher monthly payment. This will allow you to save more money to use for your next debt.
After paying off student loans and car loans, you can then proceed with paying your mortgage. Now, this venture would require a good amount of planning and execution for it to be successful. You can manage your mortgage payments easier if you add more to your monthly mortgage – say $100 per month. By consistently doing this every month, you can build up a reserve and have fewer worries about overdue payments.
Mentioned above is the overall plan to get out of debt effectively, however, this can also change.
How to Handle Emergencies
An example situation that can cause changes to your plan is when you urgently need something – such as a new vehicle for work. You probably don’t want to delve into your savings if at all possible and the only remaining debt you are dealing with could be your mortgage. If you can afford the monthly repayments, then you can go and purchase a new car.
However, a good tip is to make sure you pay the loan as quick as possible to avoid further delaying your goal of achieving a debt-free life. A mode of transportation is also essential for work and other ventures especially if it allows you to save more time, money and effort.
After purchasing your car, be sure to modify your plan according to your new expenses. Although it means adding more debts to your ‘to do’ list, it doesn’t mean that it is impossible to conquer.
The right way of managing your finances is not about having no debt at all – it is about being able to adapt to financial situations and decisions. It’s all about knowing you are now in control.