As soon as you want to get a better hold of your finances, you will always soon find the need to list down all your debts to pay off. One of the biggest reasons for this is that your debts take a big chunk off of your income on a monthly basis. You start to imagine how your budget would look like if you did not have to make big debt payments every month.
Before you start to label your debts as a waste of money, you have to remember that debts are not bad in itself. In fact, it can even give you opportunities to advance in life and even reach your goals. Your student loans allowed you to get through college without having to make you work long hours after school to pay for your cost of attendance.
The mortgage loan, which could be the biggest debt you have in your finances allowed you to come home every night to a house of your own. If you would have waited and tried to save up to buy a house in full, it could take you a long time to do so. It would certainly help if it is one of the debts to pay off this year in your list but remember, it is not all that bad.
What you need to understand is that there are types of debt which are beneficial for you and there are those that can hurt you tremendously. Having the ability to discern one from the other allows you to focus on the ones that you need to pay off. This will help you get your finances in order and give you the chance to get ahead in life.
Credit card debt
When you start looking for debts to pay off, your credit card should be on top of your list. One of the most pressing reasons for this is that card debt can put you in a lot of trouble. This happens when you start missing payments or choosing to send only the minimum amount every month to your lender. Once these things happen, your lender can start increasing your payments for the succeeding month’s billing.
Sending only the minimum amount is the bare minimum you can do for your card but it does not mean you should do it. If you suddenly find your finances in a tight situation and you can only send the minimum payment, then that can work. At the very least, you are current with your payments but your lender might put in some charges on the next month’s payment.
If you totally miss your payment, then that opens up a can of worms for your finances. For one, your lender can put in interest, fees, and other penalties on your payments. This will dramatically increase the amount you have to pay for your card. If the late payment is reported as well, your credit score might see a drop as well. These are the reasons why you might want to include your credit card payments on this list.
Payday loans should be one of the debts to pay off this year
As much as people try to avoid it, there are still situations that force consumers to take out payday loans. To understand why it is challenging to take a payday loan, CNBC shares that payday loans can cost over 20 times more in interest compared with a credit card. This can be a big blow to your finances especially if you keep that type of loan for a long time.
There are a number of reasons why people would take out a payday loan but it is usually not something you plan for. It means that more often than not, it is caused by emergencies that you did not expect. It can be getting into an accident and you are unable to work. You might have to repay back an older debt and you have no cash on hand.
One of the best ways to address this is to have an emergency fund on hand. It is an account that you use in case you find yourself in a tight spot. There are a lot of theories on how much you need for an emergency fund. Some experts say $1,000 while others more. The idea is to take a look at your budget and total your expenses. Make sure that your emergency fund can cover for those expenses for months at a time to give you some room to recover.
Personal loans from family and friends
If you borrowed money from family or friends, you need to pay them back. There is a reason why this is one of the debts to pay off this year. It is because this type of debt can put an unnecessary strain in your personal relationship with that person. This is a lot different when you borrow from financial lenders like a bank.
If you borrowed money from your siblings or even parents, make sure to pay them back. If you agreed on a repayment schedule, honor it. The only time you should break that is if you will pay everything earlier than agreed on. If there is no agreement on how you should pay it back, take it upon yourself to pay back as soon as possible. If it is taking some time, talk to them about it so they will not keep on waiting
The money you borrowed from your own funds
There might be times that you prefer to borrow from your own money. You might think that you own it anyway so why not use it at times when you need it. This is way better than getting a personal loan from formal lenders because for one, you do not have to pay interest on the loan and repayment is a lot looser.
However, one thing you need to remember is that those funds have a specific purpose in your life. If you borrowed from your retirement fund, you need that in the future when you no longer have a job that provides constant income. Also, you could be missing out on compound interest your money could be earning.
Debt accounts can help you
As you look at different debts to pay off, you need to know by now that debt is not the problem if you are faced with tremendous payments. For starters, do not take on debt if you do not have the ability to pay it back. If you do decide to take out a loan, make sure you stick to the repayment schedule. If used correctly, there are debt accounts that can even help you with your goals.
One of these debt accounts is your student loans. They can help you get that degree that you need and help you improve your chances of landing a high-paying job. Your mortgage loan could be the single biggest debt you have but it gives you the chance to buy your own house. Apart from being able to come home to a place of your own, you also get a tremendous investment with your home.
There are a number of debts to pay off that you need to focus on this year so you can free up your finances and be able to manage your budget better.