It goes without saying; your debts will pull you down faster than anything else.
Debts reduce your net worth (which is your wealth) because of the cost of the debt, but if it is bad debt then the situation is even worse. Bad debt is incurred on things that do not increase in value, whereas good debt is incurred on things that do increase in value.
Debt can be used wisely, but only for assets that appreciate or grow in value, and hopefully also generate revenue income. If debt is not controlled it can easily get out of hand. It will result in financial bondage rather than financial freedom.
The best advice is: don’t get into debt at all.
Money used to pay off debt cannot be invested, but money put into other options will enable it to grow. Debt money is lost money because it is gone. If you must go into debt, make sure that what you purchase will grow in value or produce income, or preferably have a combination of the two. Simply going into debt for luxuries such as new clothing, jewellery, electronic equipment, or a new mobile phone, is money not working for you and therefore will not be producing wealth.
Plan to Get Out of Debt – Fast
To get out of debt and achieve financial security you need to put together a debt avoidance plan. Your plan will set out goals that you need to achieve such as you need to have funds for retirement, must have paid off your home so your mortgages are gone, you are totally debt-free and you have a clean credit history in case you ever need to get credit in the future.
Here are some of the things that you will need to follow in order to avoid all debt and be in the financial position as per your plan:
1. Set up a budget - Establish a budget to help you sort out your finances. This budget will set out the income that is coming in and the expenses that you need to live by, as well as identifying those costs which are necessary as well as those which are not necessary. You have to set goals based on your expenses and your disposable income and then you must stick to them.
2. Pay high interest first - Try to pay off all your highest interest debts as fast as possible. You will need to find out where the high interest rates are and then make a short list of debts, which you will pay off sooner than others because of the charges. If you have any extra money that comes to you by way of a tax refund or sale of some assets etc., then clear the high interest debt quickly.
3. Credit Cards - As soon as you can get rid of your credit cards. They will cause you more headaches than anything. If you have more than one and are unable to consolidate all your cards, pay off the hefty interest ones first and then, once that’s done, get rid of all your unnecessary cards. Commit yourself not to put anything on your cards again until they are clear. If you have only one card, then cut up all except one that you will use.
4. Consolidate - Consolidate all your bills so that you are only paying one amount each month or week - this may make it easier for you to manage your situation. Maybe you can consolidate your mortgage and your credit card debts and car finance and other charges under the one loan, which often can be at a lower interest rate. Consolidation is a sensible option if planned soundly.
Finally, the general rule is that you should limit your short-term debt, like credit cards and charge accounts, to no more than 10% of your total income. Once you have eliminated debt, then you must look toward saving for the future.
A great tool, available in both iCashbook Standard and iCashbook Personal, is the budgeting tool. Here you can set up budgets, monitor the actual vs. the budgeted amounts and put in place calendar based cashflow forecasting so you can see at any date what your financial position will be. Check it out today!
