While debt can result from overspending, it also comes from a lack of understanding personal finance. Some people are really good at it. Others could stand to learn more. These personal finance tips for people in debt can help everyone, regardless of which group in which you’re currently included.
What is Personal Finance?
A rather broad term, personal finance covers money management. This can be expanded to encompass planning your spending, banking strategies, insurance, home loans, dealing with debt and planning for retirement—as well tax and estate planning.
The best approach to take in this regard is largely dependent upon one’s personal financial goals and where they are in life. Someone fresh out of college and just starting their career will have different goals than someone nearing the end of their career and preparing for retirement.
However, regardless of where you are on that spectrum, it’s never too late — or too early — to get started. Even if you’re retiring tomorrow, expanding your financial literacy will serve you well.
This is particularly true if you are in debt.
Managing Your Finances While in Debt
Know your situation – First things first, you’ll need to know exactly how much debt you have, the amount of money you’ll need to cover your bills each month and exactly how much income you have to do so. It’s also a good idea to get an assessment of your credit history, as well as review your credit score.
Studying your credit report will help you in a couple of ways. In addition to providing a listing of all of your open accounts, doing so will give you the ability to determine the accuracy of your report. Many people have discovered their identities have been hijacked by reviewing their credit reports. You can get one from each of the three credit reporting agencies for free each year at AnnualCreditReport.com.
Create a spending plan – Once you have a firm grasp on the amount of debt with which you’re dealing and the income you have with which to attack it, you can plan your spending to accommodate paying off your debt.
If you have more income than expenses, experts recommend using a 50/30/20 strategy, in which 50 percent of your income (or less) should be used to cover your living expenses. An additional 30 percent can be allocated to wants, while 20 percent should be employed for saving and investments.
Needs include mortgage/rent payments, utilities, transportation, insurance, debt payments and food. Wants are considered activities such as dining out, entertainment, gifts, memberships, subscriptions and clothing.
The remainder of your income should first be used to establish an emergency fund of at least three to six months of living expenses. You can then use those dollars to save and invest for your future once that is in place.
Flexibility is Key
Depending upon where you live and how much money you make, those ratios might need some adjusting. Moreover, if you have a lot of debt, you might want to chisel more out of wants to eradicate your debt as soon as possible. The experts at Freedom Debt Relief can provide you with guidance in this regard.
Whatever you do, avoid the minimum payment trap. Making minimum payments on credit card debt only serves to increase the amount of interest payments you fork over to lenders. The more interest you pay, the less money you’ll have for your savings.
More Debt Than Income?
The situation is going to require some rather urgent measures. You’ll need to find ways to earn more money, figure out how to reduce your debt load as soon as possible or, ideally, both. Debt consolidation might be a good way to go, depending upon your credit history. Consulting a credit counselor is a smart idea too. Regardless of your situation, these personal finance tips for people in debt will help you get on the road to a debt-free life.