How To Handle Debt
Facing facts about your debt will help you handle the problem. Find out how much your monthly principle and interest payments are and how much debt you owe total.
It’s surprising, though maybe it shouldn’t be, how many people that are troubled by debt problems, don’t actually know how much monthly interest they’re paying. Part of the problem may be that they really don’t want to know. Considering how much it sometimes is, one can hardly blame them.
But a true analysis of the problem is the first step to a solution. You could unknowingly be paying a good percentage of your monthly income to interest charges. Which basically means you will have absolutely nothing to show for that money. You may have the pleasure of enjoying the things you purchased. But could it have been better to wait a while and save for those items and not throw away a percentage of your income every month?
When you get to the point where the interest payments are all you can make you have hit a wall and will never pay your debt off. You are paying nothing toward principle, so you are spinning your wheels. Maybe you are not to that point, but consider where you are? How much are you paying toward interest and how much to the actual repayment of your debt?
Suppose it’s 90% interest, 10% principle. That’s approximately the case for the average home loan for the first several years. You can use an online calculator to see how long that will take in your situation.
Suppose, for example, you owe $10,000 at 7%. You could pay only $116 per month, but it would take you 10 years to pay it off. The interest would cost you $3,933 – almost 40% of the total amount.
Now that you’ve seen your situation, you need to take two further steps. Develop a budget that will allow you to make payments as large as you can handle to get the bills paid off. You could use the ‘snowball method’ and pay off the smallest one first. Then apply what you were paying to the smallest to the next smallest (now the smallest), until you’ve reached the end.
You could work the “snowball method”” in reverse, paying the highest debt first, and save a lot of money in interest. But that is hard to do because it takes a long time to see any results from your hard work.
Filed under: Management