[As usual, there’s never a bad time to read the disclaimer – Ed.]
It is often embarrassing to find yourself in debt. You might feel like a failure and not want family and friends to find out. Real friends, and certainly family will want to help if they can but if they are unaware of your situation then your problem will be up to you to solve. Debt can be a result of complacency, stupidity or misfortune. There is no doubt that the recession had casualties that did not see their problems coming. Many financial institutions allowed financial vehicles such as Collateralized Debt Obligations to be regarded as more important than their usual basis for decision making — common sense. In those circumstances what chance did ordinary people have of keeping their finances in good shape?
Debt is stressful and it is all too easy to let it get out of hand. It may begin fairly innocently with the use of a credit card to buy everyday things. There is nothing wrong with the convenience of a credit card; the problem comes once you begin to use the card to actually support your daily life. If you are short of money, the card can help but the problem comes at the end of the month when the statement arrives. If you are unable to pay off the full amount a high rate of interest is applied to the remaining balance. You have to pay a minimum amount but that is all. Over the months if your balance is gradually rising then you have a problem which may simply mean you are living beyond your means.
The importance of a budget
You should prepare a budget to look at your expenditure as a matter of urgency. It may not make good reading but it is essential that nothing is omitted. Some items may be estimates and should be updated as soon as possible with accurate figures. If you are spending more than you earn you have to take action and economize unless there are ways to increase your income. The monthly figure you are paying on credit card interest within your monthly remittance to the card company is sheer waste.
Pay off expensive balances
If you have regular income you may be able to replace your credit card balance with a personal loan at a much lower rate of interest. You will be spreading the balance into a number of monthly installments until the end of the loan. That is just part of the solution because if the balance grew because of your supporting your lifestyle you must save elsewhere as well. There are plenty of opportunities to find out more on the Internet. There are comparison websites that might reveal a cheaper energy supplier, a better insurance premium or telephone network.
Is this an alternative for you? Given that you must surely prefer a stress-free life and the chance of a comfortable retirement in the years to come you must work hard to rid yourself of negative debt, that which is both costly and an absolute waste of money. The younger you are the easier it might be.
Think long term as well
If you are a graduate, you may have started your career with a student loan to pay off so you are already in debt. Your education should give you an opportunity for a good job and future employment prospects will depend on how you perform. It doesn’t mean you should get carried away with an expensive apartment, new automobile and a fashionable wardrobe. It is tempting to think that you can afford most things when in fact there are some longer term financial priorities that you have to address. The earlier you start to provide for retirement the less you will need to put aside to build a good fund. Similarly, if you accumulate an emergency fund, you should be prepared for any eventuality.
Strike a Balance
The impediment to these saving plans is getting into debt by spending too much in the present. There is nothing wrong with the feeling in a society of confidence and optimism; it helps boost the economy. There is however always a balance to find in order to have a stable financial life.
Temptation and easy credit both contributed to the recession. While the environment of such easy credit and complacency has not returned, there is still significant debt in the USA excluding mortgages for real estate which should actually lead to a family increasing their assets. It is the debt on credit cards that is particularly disturbing because it is so easy to build up an expensive balance almost without noticing. If there is one single piece of advice on debt it is to keep your credit card spending under control and ideally pay off the statement balance in full at the end of every month. If you do that you should be in control and able to sleep more soundly at night.