Do you ever feel overwhelmed with personal debt?
There is often a point when personal debt just becomes hard to keep track of. It’s particularly the case when you have many sources of debt.
The first step to resolving your debt is to understand exactly how much you owe and to who. Once you’ve identified your sources of personal debt, you can calculate how much the interest is costing you.
The simplest way of doing this is to sit down with a pen and paper, or a spreadsheet on a computer and pull out all your bills.
Compile a list of the companies you owe money, the balance you owe and a column for the interest charged, if any.
The best place to start with finding your balances is your most recent bill. If you have the ability to sign up for an online account with your lender then log in to check your balance.
It’s often the case that you may have missed a bill or two. It happens. Perhaps letters got lost in the post or you moved home.
If you are like me you’ll often put your bill down after opening it. They soon disappear underneath a pile of papers that get moved as you clean.
I’m terrible for doing that with parking tickets!
These missing or forgotten about bills can often go unattended for months. They gather interest and penalties and then your situation deepens. Parking tickets and the speeding fine can often swiftly end up in the court system. If that happens you end up in a mess with court fees that compound your debt.
Credit reports can help you identify personal debt
To avoid getting in a mess with unpaid bills consider getting a credit report. It’s a good idea to do this on an annual basis.
There are many companies that offer free annual copies of your credit reports. Credit reports will help you find out what your lenders are reporting to each of the credit agencies.
By checking these on an annual basis you will avoid any unwanted surprises. If you ever need to apply for an emergency loan or another form of financing, you’ll know you are in the clear. Otherwise, your application will decline until you can clear up the misunderstanding.
To get a full picture, get reports from each of the three major credit reporting agencies.
The three major credit reporting agencies are Equifax, TransUnion, and Experian. Their reports often contain different information so it’s worth applying to all three. Keep in mind that the information contained in credit reports may not be the absolute latest. Sometimes credit reporting agencies experience lag in their reporting.
Once you get your credit reports, contact each lender on the report to find out what the current amount owed is.
Sign up for online access to each of these accounts if you don’t already have access. This will help you keep track of payments and balances in the future.
Organizing your personal debt: Create a list
Organization is essential to keep up to date with financial obligations and personal debt down.
Take the time to set up access and find out balance and payment amounts. It will save you more time later, and will help prevent late fees.
You should end up with a list containing three columns:
- Lender (with contact details)
- Amount Owed
- Interest Rate Charged
Keep that list in a safe place, perhaps a folder. I’d suggest sticking it in a prominent place, perhaps on your fridge. But that would just be depressing.
You need to keep your list in an accessible place and set aside time each week or at least once a month to review balances.
During this review, you will update your figures to see how you are tracking with paying off your debt.
The best way to pay off debt
Once you have your hit list of personal debts. You need to make a decision on how you want to attack your debt.
There are many methods you can use to help you pay off personal debt. The most popular methods include:
I also came up with my own personal method for paying off your credit card.
Each of these methods has advantages and disadvantages. Which one you choose is entirely up to you. Your choice is likely to reflect your personality.
For example, the debt snowball may be the best strategy for you if you need to see quick results. The articles linked above explain the benefits of each method.
The importance of a personal budget
An essential element in conquering your debt comes next and that is creating a budget.
A budget helps you understand where your money is going.
Once you see what you are spending your money on you can identify where you can cut costs.
I guarantee you’ll get a surprise by how much you are spending on certain things throughout the year. For example, I was spending $1,200 on coffee each year just by grabbing a coffee on the way to work each weekday!
I was spending more buying lunches at work. I saved around $3,000 a year by cutting out coffee, taking left-overs to work or making a lunch at home to take with me. Easy!
It’s living expenses like this that you’ll be able to cut down. These changes will empower you to move toward your financial goals.
Aside from cutting costs, you’ll be able to figure out where you may need to earn extra cash, and exactly how much.
How to draw up a budget
If you want to understand how to put together a budget I’ll be publishing a post very soon to explain to you how to draw up a budget. Sign up to my mailing list using the subscription form on this page and I’ll let you know when the post goes live. In that post, I’ll also explain how you can get access to a free budget sheet I’ve created and shared on Google Docs to help get you started.