There is not one particular reason that people find themselves in debt. It’s a complex issue, and it isn’t one-size-fits-all. In this CommonCents blog, we are going to dive more into debt, as well as tips and tricks to help you manage it.
Types of Debt
While being in debt is not ideal, some types of debt are better than others. Often types, we see debt broken into two categories; “good debt” and “bad debt.”
“Good Debt” is debt that is an investment back into yourself or that increases the value of what you own. This can include things that grow in value such as a mortgage or investments, or things like student loans.
“Bad Debt” is when you borrow money for items that you are essentially losing money on. Using your credit card to pay for clothes or food is one very common way people rack up “bad debt.” Auto loans, because of how quick cars lose their value often walk the line between “good” and “bad” debt.
The main difference in good and bad debt is whether the investment will appreciate and grow in value or depreciate and lose value.
However, even so-called “good debt” can still end up hurting you if you become unable to make your payments on time, and in full.
Tips to Getting Out of Debt
Here are few adjustments you can make to help you get out of debt.
Reduce Expenses: Free up more money that can used towards debt repayment by reducing expenses, at least in the short term. This could mean anything from a temporary spending freeze on everything except for required bills and living essentials to longer-term solutions like finding a cheaper place to live, renting out a room in your home, selling a vehicle, or other efforts.
Pay More Than Your Minimum Balance: Adding even just a little bit of extra money to your monthly payment can help you pay off your debt sooner and pay less overall.
Negotiate With Your Creditors: If you’re struggling to pay even the minimum on your debt payments, contact your creditors about making your payments easier to manage. Often, they may be willing to negotiate the terms of your credit agreement so you can make smaller and more manageable payments. Keep in mind that lower payments means it will take longer to pay off debts and you’ll pay more interest in the process.
Building an Emergency Fund
When you’re back on your feet financially, start setting aside money toward an emergency fund. Ideally, you want to keep three to six months of living expenses in an account that you can easily access. But even a few hundred dollars set aside for rainy days can help you avoid using a credit card and building up more debt.
