Debt problems plague a lot of American consumers and the reasons are varied. There are some who are under unmanageable credit card debt while others feel trapped with their student loans. There are some people who are also deep in debt and behind on their house payments and risk losing it back to their lenders.
Financial education can help prevent money problems but there are still a lot more to it than just knowing which ones to avoid and which ones to focus one. Understanding how to stay away from debt is already an immense help but still, there are still millions of consumers who can’t seem to make ends meet and stare at a blank wall hoping to figure out answers.
Sometimes, it is a matter of need and borrowing or taking out loans presents itself as the only way out of their current financial need. There are also times when debt seemingly transforms into a sinkhole were the only option to try and stay afloat is to take in more debt without regard to how much they would all total at the end.
Nerdwallet.com shares that the average credit card debt for an American household is around $16,000. That is not a small amount and would have better been used in an investment. Compound interest becomes an enemy rather than an ally. It puts you deeper in debt as it accrues on top old debt rather than earn interest on your favour.
Crawling out of debt
For a lot of consumers, they just need to know how to carve their way out of debt and here are a few things they can look into to help get back on the right track.
- Too low reserve funds. Debt problems usually occur when you do not have enough funds to cover a specific financial obligation. You normally use your credit card for convenience, timing your payments at the end of the month and the rewards that it brings. Once the statement comes in, you pay the whole amount and not carry a balance. This is how to be a smart consumer when it comes to credit cards. But when you use your card because you do not have funds to pay for your purchases even after you get the statement then debt usually follows.
- Too big interest rates. Creditcards.com shared that people with bad credit takes the blunt on credit card rates with the highest 22.73%. That is adding almost $23 for every $100 dollars you purchased but you did not send in your payment on time. The next time around, you are assessed the same rate at $123 principal. That is the power of compound interest and rather than being against it, it is better to use it for your own gain. Save up and try to use compound interest to earn money rather than losing it. Ditch the cards with the highest rate and concentrate on the lower ones.
- Too many debt accounts. One other cause of debt problems for consumers is biting into too much debt that they do not have any wiggle room left for their finances. This usually happens when you do not keep track of those small monthly payments and they all add up to a huge bill at the end of the month. One way to combat this is to keep track of all the purchases you make especially the ones where you use your card and make small monthly payments. Avoid spreading yourself out too thin because you run the risk of missing one or two payment as you go along. You can also consider debt consolidation when you find yourself trying to juggle too many debt accounts all at the same time.
- You give too much to other people. There is nothing wrong with being generous and helping out those poeple who needs help. In fact, there are people who has made it their mission to help those who are down and out. But as you help other other people, try to not put yourself in a position where you would be the one needing help. Make sure that you are able to meet you own needs first so you can be in a great position to help other people.
- You do not have any long term goals. It is easier to spend than save but you need to think long and hard about your future. Having concrete plans dictate your present decisions and keeps you away from debt problems. If it is saving enough to make a downpayment on a house then you would think twice before buying that brand new tv or getting a new couch. Knowing that you are saving for a future dream keeps your spending focused and targeted only on your needs.
Increasing financial preparedness
Getting a handle on financial preparedness is always easier said than done. Here are some tips to help increase your chances of preparing better for whatever comes your way in the future. These are some of the things that you need to focus on.
- Put more funds in your emergency and rainy day fund. Your reserve funds will help you get over unexpected challenges. If you suddenly lose your job, you stand to lose just your monthly salary. If you cannot make payments on your house, you risk delinquency and inevitably default on your loan. There are ways to build up your reserve funds but the main idea is consistency. It is not enough that you add to your account once or twice a year. You need to make sure that it is one of your main priorities to help you fend off debt problems in the future.
- Your retirement fund is financial safety net. Statisticbrain.com explains that the average age for consumers to retire is at 63 years old. With this, you already have an idea how many more years you have left before you stop working. Work your way back to see how much you need to set aside every year to have enough by age 63. Retirement is inevitable and the only question with it is when.
- Set your children off on the right path. For parents who have kids running around the house, the time will come when they will be all grown up and going off to college. With all the news on how student loans cripple graduates, you might want to help your children out by setting up a college fund for them. The earlier you start the better because they would have more to use when the time comes that they start understanding what cost of attendance really means and how much college costs. Aside from helping them with a college fund, you might also want to teach them about handling money early on. The earlier they start, the better they get use to it and the bigger the chances they would stick to it when they get older.
Debt problems will always be present and the idea is to first prevent it from happening or manage it wisely so you can get out of it. It will always be part of life because there will be times it comes even though you have made excellent efforts to keep it away from your finances. The best thing that you can do is to make sure you deal with it and learn from the experience.