February 16, 2023 | Homeowners

Drowning in Debt? Here’s What to Do About it Right Now

Being in debt is often a painful situation, one that is easy to avoid talking about. However, the past few years have been rough on many people. Some have had to deplete their emergency savings while experiencing a job loss or layoff. And rising prices and inflation do not help matters. If you’re in over your head, you could consider filing for bankruptcy. This will eliminate your debts, but the consequences could follow you around for years. Luckily, there are several potential solutions, leaving bankruptcy as a last resort.

Whatever the reason for your debts, keep in mind that pointing fingers or blaming yourself isn’t helpful. Honest yet gentle conversations can be the key to turning things around and moving on to a brighter future. It all starts with understanding how debt works and what options you have to come out stronger than ever.

Good Debt Vs Bad Debt

How can debt ever be a good thing? Certain types of debt can help you accumulate assets or skills that set you up for financial success. For example: 

  • Student loans open doors to higher education and can ultimately lead to a lucrative career. 
  • A mortgage allows you to purchase real estate that increases in value over time and builds your equity.

Examples of bad debt include using credit cards to fund extravagant vacations, televisions, clothing, or any items that have no potential to grow in value.

Investing in real estate is one of the best ways to protect and grow your wealth. Find out why in the posts below:

Loans Vs Lines of Credit Vs Credit Cards

In addition to good debt and bad debt, there are also different loan structures. Some make it easier to pile up debt than others. For example, if you take out a loan to buy a car, you have a regular payment for a predetermined amount of time. Presuming you make those monthly payments, the debt disappears once the loan period is over.

Lines of credit are different. You can tap into them as often as you want, for great or small amounts. Borrowing a few dollars from a line of credit here and there may not seem like a big deal, but it can add up significantly over time. Even worse, because it’s a revolving loan with no set repayment date, you may find yourself constantly buried in debt.

Credit cards are often the worst culprit of all. Every day, you receive new offers in the mail, often at high limits and tantalizingly low introductory rates to entice you to sign up. Making the minimum payment all but guarantees you will never pay off the principal.

Take an Honest Look at Your Habits

Sometimes, accumulating debt means not having enough income to cover your basic needs. However, it could also indicate that you’ve picked up a few bad habits over the years. Modern technology has made it far too easy to use a credit card for almost everything. Automatic payments for internet bills, streaming services, and subscription plans – all charged to the card. Plus, you may find yourself absent-mindedly pulling out a credit card to cover everything from fancy meals to impulse purchases online. 

The purpose of examining your spending habits is not to beat yourself up. It’s simply so you can see where the money is going. Once you’re aware, you’ll begin to be more mindful of what you really need and when it’s better to save those extra funds instead of buying something new.

Create a Plan to Overcome Debt

Once you’ve taken a hard, honest look at your finances and your habits, you can start forming a plan to pay off or minimize your debts. 

  • Make a list of everything you owe.
  • Rank your debts from the highest interest to the lowest.
  • Make a list of needs and wants to guide your new spending habits.
  • Calculate how much money you have left each month after paying for all necessities.
  • Allocate any extra funds to go toward paying off your debts.

Above all, be sure to set a definite and realistic date that you intend to become debt free. This step is critical! A written goal keeps you focused and dramatically increases your chances of success.

Buying your first home might be the perfect way to celebrate getting your debt under control! Here are some resources to help you get started:

Debt Reduction Strategies

Now that you’ve created an ambitious but achievable plan, it’s time to put it into action. Here are a few techniques many people have used to become debt free.

  • Pay more than the minimum: This may sound too simple to work, but it is effective. Even a few dollars extra towards a bill each month can make a difference, especially with high-interest credit cards.
  • The snowball technique: Start by paying off your smallest debt first while making minimum payments on the rest. When the smallest loan is paid, take that money and add it to the second-lowest debt. Why does this work? Seeing a balance reduced to zero is exciting and motivates you to keep eliminating debt. It’s all about changing your behaviour. In the end, you’ll find the math really does add up!
  • Mortgage refinancing: If you have a lot of high-interest loans, you might consider rolling them into your mortgage when you refinance. However, it is best to talk to a financial advisor to see if the numbers actually work. Your mortgage may have the lowest interest rate, but it will take years to pay it off completely.
  • Negotiate lower interest rates: Consider calling each of your creditors to try to negotiate a lower interest rate. They will want to keep you as a client even after your debt is paid. As a result, they may be open to offering you better solutions. In the worst-case scenario, all they can do is say no.

You may be surprised at how quickly your situation turns around once you commit to taking small but consistent steps to eliminate debt. Once you’ve reached your goal, you can begin saving money or even consider starting an investment fund. In any case, you’ve achieved an impressive milestone, and congratulations are in order!

Having debt can make buying a home challenging, but it doesn’t always mean it’s impossible. For more information, check out our post Can You Buy a House With a Poor Credit Score?

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