It is becoming more obvious as time goes on that problems with debt are more closely related to personal behaviors than they are to income. It is not only the poor who suffer from problems with debt. Even people making over a hundred thousand dollars a year can find themselves struggling with debt. This is because, when it comes to certain people, the more money they make, the more of it they end up spending. The end result of this is that it is not how much money you earn, it is how much of that money you save. Millions of Americans are suffering from debt. In America, about 900 billion dollars worth of credit card debt is carried over from month to month. This process can not be allowed to spiral out of control.
The Importance of Debt Management Plans
The first step in creating a debt management plan is determining how the situation was created in the first place. It could be the result of a sudden change in income, or it might be the result of living outside of your means. It is also important to identify just how much debt you are in. Any bills that you receive each month that have a total amount of debt owed should be added up. The next step is to determine which debt needs to be paid off first. You might start by tackling the smaller loans, since you won’t have to pay them off anymore once you are finished.
The next step that you should take is to get a hold of your annual credit report. If you spot any errors, you can have them corrected by getting in touch with the creditor. Any account that has a zero balance should be closed. Once the smaller accounts are taken care of, it is time to get started on a debt management plan. Start by putting together a budget. It might be helpful to buy budgeting software to assist you through this process, although sometimes a simple spreadsheet will do the trick. This will help you identify the source of the debt.
Professional Debt Management Plans
If you don’t feel like it is possible for you to set up a reasonable plan on your own, it might be a good idea to talk to somebody that can help. Nonprofit debt counselors are some of the most useful organizations to get in touch with. Credit counselors can help you set up a payback schedule that allows you to manage your existing debt and prevent it from growing.
If you have doubts about whether or not credit counselors will be able to help, the results of a study conducted by Georgetown University’s Credit Research Center might help you feel more confident. The study, which was conducted based on the results of ten different agencies, found that the earlier assistance took place, the better the results. Interview that took place in person or over the phone appeared to be equally effective. Most importantly, the creditworthiness of those who took part in a debt management program improved. They were less likely to file for bankruptcy and developed better credit ratings.
A Sample Debt Management Plan
The ultimate goal of a debt management plan is to satisfy the debtor and the creditor. The plan is created in order to ensure that the debt is paid off as soon as possible, and to reduce total payments. Suppose that the following debts were owed to three creditors:
Company A
Debt: $2000
Interest: 20%
Minimum Monthly Payment $60
Company B
Interest: 15%
Minimum Monthly Payment $80
Company C
Debt: $5000
Interest: 23%
Minimum Monthly Payment $160
In total, this amounts to $300 dollars a month at the beginning. The total amount owed is $10,000 dollars. If you only make the minimum monthly payments toward each creditor, you will end up paying more than twice the amount owed by spending a total of $10,331.91 in interest. It will take you sixteen years and nine months in order to pay off all of this debt.
Amazingly, there is a way to drastically decrease these figures without paying any additional amounts each month. You can still pay $300 each month, but vary how much money goes toward each individual creditor. If you do this in the optimal way, you can pay off all of your creditors within 4 years. You will also only pay a total of $4,176.11 in interest. Part of the reason for this difference is the fact that, if you were to only make the minimum payments, some of the loans would be paid off while others would still be going, meaning that ultimately you would be paying less than $300 a month if you were only making the minimum monthly payments.
Suppose that you have extra cash on hand and are able to pay $400 a month. The difference that this makes is surprisingly large. You would actually be able to pay off all of your debt in only two years and eight months. You also would only end up paying $2,585.76 of interest.
Again, a very precise payment plan would need to be organized in order to achieve these results, so it is wise to take advantage of some budgeting software or a credit counselor.
