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5 Tips to Manage Debt: Your First Step to Financial Freedom
Financial freedom may look different for everyone. To some, it could be the ability to buy big-ticket items like new gadgets and appliances, or even a new car or home. For others, it’s being able to afford to travel and go through a bucket list of adventures. But one thing often keeps you from enjoying financial freedom: debt.
When debt becomes too big to manage, it can get in the way of your financial goals and you may find yourself trapped in a vicious cycle of debt. But not all hope is gone.
Here are some tips for understanding and managing your debt as the first step to financial freedom.
Confront your debt. Since you cannot understand what you do not know, it’s important to be honest about your finances. Put together a list of all the debt you owe to get a clear picture of the total amount that needs to be paid back. This should include not just the principal amount borrowed, but also any interest owed and even penalties that must be settled.
Get organized. Now that you have a better idea of how much you need to pay back, turn your list into a debt sheet. Since you may have acquired each loan at different points in time, you need to keep track of each loan’s maturity date, or when you expect to finish paying the entire amount. By organizing your debt payments in order of maturity, you can see which loans can be settled quicker than the others.
Be systematic. Sometimes it can be tempting to make debt payments according to how much money you have on hand. However, such erratic payments make it harder to keep track of how much progress you’re making in paying off the total loan.
When debt becomes too big to manage, it can get in the way of your financial goals and you may find yourself trapped in a vicious cycle of debt. But not all hope is gone.
Here are some tips for understanding and managing your debt as the first step to financial freedom.
Confront your debt. Since you cannot understand what you do not know, it’s important to be honest about your finances. Put together a list of all the debt you owe to get a clear picture of the total amount that needs to be paid back. This should include not just the principal amount borrowed, but also any interest owed and even penalties that must be settled.
Get organized. Now that you have a better idea of how much you need to pay back, turn your list into a debt sheet. Since you may have acquired each loan at different points in time, you need to keep track of each loan’s maturity date, or when you expect to finish paying the entire amount. By organizing your debt payments in order of maturity, you can see which loans can be settled quicker than the others.
Be systematic. Sometimes it can be tempting to make debt payments according to how much money you have on hand. However, such erratic payments make it harder to keep track of how much progress you’re making in paying off the total loan.
An APR calculator — or one that computes the annual percentage rate of your loan — can help put your debt payments in order. By plugging in details such as the loan amount, loan term, interest rate, and how often you’d like to make payments, the calculator provides a fixed amount that you should set aside to pay off the loan according to the terms of the agreement.
Have a budget. Treat your debt payments as a fixed expense in your budget, something that you need to pay regularly just like your utilities, Internet, and mobile phone bills. Doing so allows you to make decisions on how to adjust your budget accordingly — for example, cutting down on certain expenses or imposing a shopping freeze until the debt has been paid off.
Develop a healthy relationship with debt. The truth is, that not all debt is bad. When you borrow from financial institutions, you are building a relationship with them. If you show that you are a good customer by paying your monthly amortization diligently, you may eventually have access to lower rates or other privileges reserved for preferred clients. Having a healthy credit score is a big advantage when you apply for a loan to buy a house or car, or even to expand your business. As long as it is properly managed, debt then becomes something that can propel you forward to reach your financial goals.
Have a budget. Treat your debt payments as a fixed expense in your budget, something that you need to pay regularly just like your utilities, Internet, and mobile phone bills. Doing so allows you to make decisions on how to adjust your budget accordingly — for example, cutting down on certain expenses or imposing a shopping freeze until the debt has been paid off.
Develop a healthy relationship with debt. The truth is, that not all debt is bad. When you borrow from financial institutions, you are building a relationship with them. If you show that you are a good customer by paying your monthly amortization diligently, you may eventually have access to lower rates or other privileges reserved for preferred clients. Having a healthy credit score is a big advantage when you apply for a loan to buy a house or car, or even to expand your business. As long as it is properly managed, debt then becomes something that can propel you forward to reach your financial goals.
Understanding and managing your debt as the first step to financial freedom is just one of the tips we have in Salmon’s Pera Serye. Follow us on TikTok for more tips on financial literacy.
17.07.2024