Debt Management How Does it Work

What is debt? Sounds like a dumb question? If it was would so many people be getting debt wrong? Debt is an amount that you borrow which you must pay back over a period of time with interest added. So it does sound simple but it is actually much more complicated than that due largely to how we handle debt.

A lot of people have gotten into debt and are unable to get themselves out. That is why we are seeing the astronomical rise in filings for bankruptcy. So much so that the US govt eventually had to pass a law that made it harder to file for bankruptcy, or effectively made it more difficult for you to get out of debt.

There is still good news. Its not easy, its not fun or even quick. But it will get you out of debt if you are prepared to undertake careful planning, hard work and patience.

The first thing is to recognize what is good debt, or financially sound debt, and what is bad debt. There are a few points to what determines a good or bad debt. If the debt is because of an asset creation, like a home loan, it is a good debt. Alternatively, if ANY debt is something you cant afford, then it is a bad debt. Bad debt is credit card debt or anything that you have used to buy luxury items. Bad debt is loan advances or anything that takes more in value that the item gives.

Therefore its simple, first categorize your debts and start paying off the highest interest bearing debts first. Store your credit cards in a locker at the bank so you will only ever use them for a real emergency.

Make more than the minimum payment on your credit card otherwise it will be decades before you pay them off and end up paying more than 4 times the value of the item you originally bought.

You may want to consider a second job to help you pay back your debt faster. You could see if you have anything to sell. It is likely that you are in this situation because you spend too much and dont save enough so immediately reverse this situation.