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Managing Your Debt obligations

It’s not unusual how most people don’t have any idea where their money went. A month goes by and they find themselves wondering what they did with it. If this is you and you want to get your finances and, subsequently, your debt under control, then you need to start managing your debt obligations.

The first step is to determine your spending patterns and then identify unnecessary expenses. For one month, write down every single cent you spend – from new clothes to that magazine you bought on a whim. You need to know exactly where most of your money goes, after paying for the obligatory rent and utilities bill. This way, evaluating your spending habits is easier and you can easily identify what you can live without. Then, tally the expenses on the list and compare the sum to your monthly income. Your expenses should be within your monthly income. If it goes beyond, raise a red flag.

Consider also if there’s any way to increase your take-home pay. If you get a big tax refund every year, that means you're having too much withheld from your paycheck. If that's the case, you can reduce your withholding by changing your W-4 at work.

Next, make a list of all your debt obligations and the interest you’re charged for each. And once you’ve done all that, you’re ready to start lightening your load.

The basics of debt reduction are simple but are sometimes hard to follow-through. But if you are determined to be in charge of your finances, cut down on your variable spending and put the extra money toward your debt payments. Once you determine the maximum amount you can pay off each month, pay down the debt with the highest interest rate first - that usually means your credit-card balance - while paying at least the minimum monthly amount due on all other revolving bills.

Once the debt with the highest rate is already paid, focus on paying the debt with the next-highest rate. But if you have a credit card with a low introductory rate that will go up after a fixed amount of time, strive to eliminate that balance before the low rate expires.

You might also consider moving some of your high-interest credit-card balances to a card with a lower interest rate. But make sure to read the fine print on any invitation to transfer balances. Sometimes such low-interest-rate offers are only in effect for short periods of time, after which the rate skyrockets. What's more, consolidating your debt on one card may lower your credit score if your debt-to-available-credit ratio worsens.

Another strategy that you might want to use for managing your debt is to rein in discretionary spending for a few months. It definitely goes a long way toward tackling debt. But if that's not enough, try to reduce your fixed expenses. Take steps to lower your household bills; refinance your mortgage to get a lower interest rate; or, if you have a good payment history, ask your credit- card company to lower the interest rate you're charged.

Yes, you might feel miserable while you’re in the process of paying off your debts. But the reward of finally being free from your debts is a better feeling than continuously worrying about payments. So manage your finance and your debts well.

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