Debt is money owed to someone else.
According to a recent report, the average debt per citizen in the UK stands at £31,867 and that’s a problem. That’s because the average credit card balance would take approximately 25 years and 3 months to pay off by making only the minimum payments.
What’s more, the interest owed on debt can accrue quickly and overdue fees can be exorbitant. That means you want to avoid taking out debt unless you really need it.
If used responsibly, debt can take care of unforeseen expenses. It can also give you leverage to improve your net-worth if used wisely.
Examples include financing your needs for a home (with a mortgage) or for self-development (with a student loan) can be greatly beneficial to you in the long run.
However, debt used carelessly can leave you making payments for years to come while your dreams remain on hold.
Bad debt is debt taken out to buy a depreciating asset or things you don’t really need like cars, jewellery, and so on. Avoid buying something if you can’t afford it outright.
Bad debt doesn’t do much to make you better off in the long run and should generally be avoided at all costs.
How Much Debt is Considered Too Much and How to Calculate Yours?
Some red flags will tell you if your debt is out of control. According to Bankrate, a plummeting credit score, the need to hide your debt, and maxing out all your credit cards are signs you have too much debt.
Credit reports show you a detailed account of how much debt you owe and your respective creditors. You can also view other information like missed payments.
For a detailed report on how to know how much debt you have, check your credit report.
Paying your bills on time is important to build your credit score and stay out of legal trouble.
This will not only help you avoid late fees; it can also prevent you from being reported to your credit bureau. If you find yourself regularly late on your payments, it may be a sign your debt is getting out of control.
Avoid Debt Collector Phone Calls
If you know you have overdue payments, you may begin to receive collection calls from recovery agents.
If you catch yourself ignoring calls, it’s a good sign that your debt may be getting out of control.
Live Paycheck to Paycheck
Are you finding that you’ve got too much month at the end of your money?
Ideally, you should be able to save a small amount of your salary after taking care of living expenses.
Living paycheck-to-paycheck is a clear sign that your debt may be getting out of hand. You might have to lower your expenditures or find additional sources of income such as a second job.
Don’t Have Emergency Funds
Emergencies are often unforeseen. Medical bills, accidents, and household expenses can pop up when they’re least expected.
Try to have around £1000 saved up so you can take care of any emergencies without needing to go into debt.
Need Credit to Survive
“[Credit is a system whereby] a person who can’t pay, gets another person who can’t pay, to guarantee that he can pay.”
― Charles Dickens
You should be able to save a small percentage of your income even after deducting living costs.
If you’ve had to take out loans just to pay the bills like rent or utilities, it’s a strong sign your debt is getting out of control.
The bottom line is: are you struggling to sleep at the end of a long day? Do you go to bed but stay up late thinking about your bills?
It could be your financial worries are spiralling out of control. In this situation, it’s best to handle the situation sooner rather than later.
7 Reasons People Get Into Debt
To become an expert at your finances, you need to know where every single Pound is going.
Since not everyone is an expert with money management, a good way to work on this is by installing an expense manager on your mobile device to track your spending.
A nifty rule of thumb is to save roughly 30% of your income. If you find that you’re not able to save this much or anything at all by the end of the month, it’s a good sign that your debt might be getting out of control.
If you don’t save money, it will be harder to invest or pay for emergency expenditures.
Sometimes, forgoing certain comforts and luxuries is vital to living below your means to save money. Making sacrifices is necessary to work towards the larger goal of financial freedom.
Practising delayed gratification is a great way to accustom yourself to making sacrifices for the things that really matter in life.
In the meantime, pay attention to problem areas that lead to debt accumulation.
Gambling is a source of trouble. As a risky hobby, it can land you in a lot of debt.
Statistically, the house always wins. It’s safe to say that lottery winners are outliers and the majority of gamblers will lose everything.
Divorce is also a potential issue. As if a divorce wasn’t already difficult enough, the legal proceedings from it could be devastating to both parties.
Attorney fees, court charges, and alimony are many ways that divorce can get you into debt.
Medical expenses are also important to account for. Diseases and accidents can occur out of the blue and can be completely unexpected.
While creating your budget, include an allowance for medical expenses to ensure you don’t have any unpleasant surprises.
Strategies to Get out of Debt
If you haven’t already, create a monthly budget with information about your income and expenditures.
This way you’ll have a clear idea about how much money you’re spending and how much you’re able to save at the end of the month. This is the first step to managing your finances like an expert.
But getting out of debt requires more effort than that. When making payments towards your credit card and other loans, try to repay more than the minimum to clear down your debt faster and foreclose any outstanding accounts.
The debt snowball is a useful technique. This is where you pay off your smallest debts first. Using this technique lets you feel you’re making making progress towards closing out your loans.
And of course, desperate times call for desperate measures. A surefire way to quickly get out of debt is to cut non-essential expenditure. While putting off movies and ice cream doesn’t sound like a lot of fun, paying your debt off sooner and being able to pursue your dreams will be.
Another way to tackle a cash crunch is to increase your income so you don’t need to make as many sacrifices. If you’re thinking about taking up another job to supplement your income, you can read all about choosing a career.
You may find that the extra hard work is worth being able to have enough to chase after your dreams and get the things you desire.
Yet another strategy is to sell things you don’t need. Downsizing can help you raise cash quickly to get rid of your debt. If you haven’t used something in more than 3 months, consider whether or not you really need it, and if not, be prepared to gracefully let it go.
And if you feel like you need to make changes to your lifestyle to better pay down your debt, consider dropping habits that are draining your resources the most. Parties, shopping sprees, and expensive vacations have to be cut out entirely if you’re looking to save more of your income to put towards paying down your debt.
Lower Your Interest Rates
One last idea: when dealing with mortgages and other types of loans, contact your bank and try to negotiate a lower interest rate and perhaps even increase your loan tenure.
Lowering your interest rates will help you reduce the amount of interest you pay and even buy you more time.
Things to Know While Taking Risks
Setbacks happen at different stages in life and for different reasons. Sometimes, luck just doesn’t favour us. While we do our best to keep control of things, things happen, and you should accept it wholeheartedly.
If the recent COVID-19 pandemic has caused you to feel depressed, remember there are always opportunities right around the corner. It’s important to stay positive.
“Nothing in life is to be feared. It is only to be understood.”
What’s more, there’s nothing to fear but fear itself. It’s a rational response to danger, but it can also hold us back from achieving our dreams. Consider your position and take calculated chances in life without letting your inner fears hold you back.
And being in tune with your instincts is more helpful than you realize. Sometimes a feeling is so strong that you just know what’s the right thing to do.
There are times to step back and think, and there are other times to trust your gut. On a certain level, you know exactly what you have to do and why. Take a moment to listen to yourself and understand how you really feel.
But even with a clear roadmap before you, you’re likely to come across a few obstacles. If you feel like giving up, it’s important to remember why you started.
How did you feel? What made you consider taking a risk? Does the cause still matter to you?
When taking a big risk, it’s important to remember what your goals are and what you’re willing to go through to achieve them.
Need Help With Handling Debt?
If your debt is inadvertently causing you stress, anxiety, and sleepless nights, it may be time to consult a financial advisor You might gain some valuable guidance on how to handle your situation better.
Being guided by a mentor can help you make smarter choices which could lead you to a much better financial standing down the line.
And contrary to popular belief, not all debt is bad debt. In fact, you can use debt to help you increase your net worth by investing in a house or your education.
On the other hand, misused debt can end up taking years crushing you financially. If you can, it’s a good practice to avoid unnecessary credit cards or luxury items until you can afford to purchase them outright.
If you feel your debt problem is spiralling out of control, go ahead and speak to a financial advisor or counsellor. If you choose to be open about the situation you’re facing, you’re more than likely to find that you have options to break free from debt!