Debt is a reality for many people, and it can be overwhelming to find your way out of the sinking hole. You must take some time to educate yourself on how debt works and what steps you can take to get back into a good financial situation.
This blog post will provide sound advice on how to best manage your finances when recovering from debt.
Make a budget and stay within your means
The first tip is the most important yet often neglected. Make a budget and stick to it! It may take some time to create the perfect budget that works for you, but it will be easy to manage your finances once it’s done.
When creating your budget, a good rule of thumb is not to spend more than 50% of your take-home pay on either your rent or mortgage and just 35% of your take-home pay to cover all other expenses.
Good advice for staying within budget is only to buy what you need.
Pay off the highest interest rate debt first to save on interest charges
Paying off debt can be confusing when you have to keep track of varying interest rates for each debt. Pay off the biggest one first because the higher the interest rate, the more you will pay in interest over time. Try not to pass on paying off one debt until others are paid because that can cause your debt to snowball. This means that all of your money goes towards paying off debt, and nothing is left for you to live on.
Ask help from mortgage refinancing to have your mortgage restructured in a way that will make it easier for you to pay off the debt. Yes, there’s an add-on interest, but it will make the repayment terms lighter and more manageable for you in the long run.
Consider downsizing your home or moving to a less expensive area
This can be a hard decision to make, but it might be necessary if you’re spending more money on your mortgage than you bring in as an income. You don’t have to sell everything and move in with a relative. It’s more about being practical and moving to a smaller house or an apartment cheaper than your current rent. A good way of doing this is by renting out rooms in your home to roommates that can help you pay the mortgage.
Keep track of all your expenses, including small things like coffee or snacks at work
Little things always add up. Try to be conscious of how much you spend on things like coffee or snacks at work, as well as other purchases that are quickly forgotten.
The smoothie, burger, candy bars, and other snacks at work add up to a lot of money in the end. Consider bringing your lunch from home, or buy cheaper options like fruits and nuts to snack on.
Budgeting is tricky, and it will take some time for you to get into the habit of writing down every purchase. Try using a tracking app instead if this proves too difficult. At least note down expenses you forget about as soon as possible so that it’s easier for you to do budgeting at the end of the month.
Create an emergency fund for unexpected expenses or job loss
If you often find yourself in a situation where you have no money and no means of getting any help from anyone, it could be the perfect time to start building your emergency fund.
Adulting can be challenging, which means saving up for any eventuality — including job loss or unexpected expenses. Set aside a small amount each payday for your emergency fund rather than spending it on frivolous things.
For example, the $20 a week you save from not buying your coffee at Starbucks can go to your emergency fund. The same goes for the money you save from preparing your meals instead of buying takeout.
Get rid of all credit cards except one with a low limit that you use only in emergencies
Using a credit card to make purchases will only put you further into debt. Financial advisers suggest canceling your cards after you’ve paid them off. Just leave one for emergencies and don’t use it for anything else.
If you have to make purchases, otherwise there’s not enough cash in the budget, get an interest-free credit card that can be used at selected places only. This will limit your spending and ensure that you are only using the card for necessities like food, medicine, and paying your utility bills.
You may be overwhelmed by the debt, but don’t worry. With the right frame of mind and some time invested in understanding what it takes to get back into a good financial situation, you can have peace of mind knowing that you’re taking care of both your present and future needs.