An important step for families in taking control of their finances is to understand and be able to deal with their debt management. When budgeting for monthly expenses one important ingredient in that budget should be the provision for managing debt. It is entirely possible that through budgeting and debt management you and your family can build financial security and independence, and save a great deal at the same time.
Unexpected events that may arise during the month often times create the need to use credit. These situations should be anticipated in any family’s monthly budget. What happens most often is that families will spend more in their monthly budget than there income will comfortably allow.
When these conditions are present, the use of credit cards becomes not a practice that takes place out of necessity, but a way for families to live beyond their means. A family living at the very edge of their income is a family headed for serious credit issues in the future. So how can a family live comfortably, manage their debt, and save for the future? There are many ways, and here are a few.
First, the family should take a detailed look at their current debt. A typical family will have several sources of debt from their mortgage, to credit cards and student loans. For most, a mortgage payment is a fact of life and the necessary debt to incur. You should ensure that you have the most competitive interest rate that you qualify for and that the payment is completely affordable. Four other loans and sources of debt, you should as well make sure that you were getting the best deal available, but with this other debt, the goal should also be to eliminate it as quickly as possible.
If you find yourself in a position where you have equity available in your home, it is a good idea to inquire with your bank as to the most competitive rates that would be available for debt consolidation. Many Americans use this tool as a way to combine their debt into one payment, which makes it more convenient, but could also mean lower payments and lower finance charges overall.
If you do not have equity available in your home or you do not have enough equity to cover all of your other sources of debt, you should take those sources of debt and prioritize them in order of interest rate. Those sources of debt with the highest interest rates demand your most immediate attention. The quicker you eliminate sources of debt to carry higher interest rates, the sooner you will become debt free.
Example: if you have $10,000 owed on a credit card at 5% interest and $3000 owed on a car loan at 7% interest, the car loan should be priority one. This does not mean neglect paying for the credit card account; it means making the minimum payments on the credit card and diverting any extra funds to satisfying the balance of the car loan. The goal is to have the least amount of money as possible at the higher interest rate.
Once the car loan is paid in full you will then be able to take the minimum payment you are in making for your credit cards plus the money that you are using to settle your car loan debt, and you’ll be able to begin the aggressively eliminating the credit card debt next.
The best remedy for debt management is to never get into debt at all, but for many Americans that is simply not an option; so the next best solution would be to eliminate that debt in the most efficient way possible.