Getting a handle on your finances and clearing debt

The first step to clearing debt is to work out how much is owed to whom. (Rawpixel pic)

No one plans to fall into debt but there are many reasons why people do, such as the loss of a job, unexpected medical circumstances or increases in the cost of living.

Regardless of the reasons, and how much is owed, with management and diligence, it is possible to overcome a financial slump.

The key to managing debt is to not give up. The first step to tackling debt is to take stock of what is owed and understand one’s debt situation.

1. Get your financial situation in order

Compile a list of current debts owed along with the most recent statements available for each.

Start by sorting these debts into categories that may include: utilities, rent or mortgage, bank debts, loans, personal debts and credit cards.

Then decide which of these categories requires the most immediate attention.

For example, there is nothing worse than owing money to a friend or family member, so these debts should always be repaid first. These debts can even lead to legal action if they are allowed to pile up.

2. Gauge your priorities

While borrowing money may have been a necessity at the time, interest rates can often overpower even the best-laid plans for repayment. Business Times calls this strategy “watching interest risk”.

List debt in order of the highest interest rates to the lowest. Those with the highest interest should be the No 1 concern because they are more difficult to pay off.

Consider a payment plan that pays the largest amount to these debts, or possibly repaying this higher interest rated debt with another source at a lower rate, then tackling a more manageable payment.

Paying the minimum balance will only sustain the debt, it is important to pay what is owed on the statement to see debts reduce.

Know the difference between good debt and bad debt.

3. Create a debt repayment plan

Create a monthly bill calendar to keep track of payments. Include who and what you owe to keep a better handle on finances.

Once it has been established which debts are the first priority for repayment, generate a plan that can be added to this calendar.

While working with one or two high-priority debts, continue to make at least the minimum payment on others to avoid racking up late fees.

AboutMoney.com offers a free, downloadable monthly payment checklist that can assist in generating a reasonable schedule, even if paycheques fall on different days each month.

Or employ a financial counsellor to assist if all else fails and the debt cannot be got under control. Understand how debt affects one’s credit score.

Be patient about reducing or eliminating debt. The road to debt freedom may be long, so be sure the plan considers the long-term work that debt reduction may require.

Keep a folder with the most recent statements and the new debt reduction plan in an often-used area of the home and calendar and constantly revise and monitor this until the goal is reached.

Staying organised and understanding the nature of one’s specific debt situation will help to create a unique plan that is right for each individual and their financial needs.

This article first appeared in The New Savvy.

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