Have you ever wondered how a person with about $50,000 or more in debt manage to pay them all off within a span of 2 or 3 years? Have you been thinking of ways to get rid of your debt and how to handle your finances? According to the Wall Street Journal and Edvisors, student loan debt levels have skyrocketed to an average of $33,000 per student. If you factor in credit card debts and other loans, it is no surprise that many people deal with anxiety, sleepless nights, and possibly even bankruptcy. To be free of this heavy debt burden, it is important to be wise about finances. While different strategies work for different people, the essential thing is to be able to manage our money the best way possible so as to cut the chains that hold us from living a debt-free life. Here are some tips that you may find helpful:
1) Create a budget
A budget is the key to managing your spending and avoiding the accumulation of debt. Track both your income and expenses. Where do your funds come from? How can you break down your paycheck to suit your lifestyle and needs? Where does your money go and which areas do you spend a lot of money on? How could you minimize your expenses?
- Be realistic about your budget. If you don’t earn a lot, don’t expect to spend on expensive things. Understand the difference between what you need and what you want.
- Reevaluate your budget often. If you always go over, you would need assess your lifestyle choices. Prioritize your expenses. It may be necessary to cancel those media subscriptions or stop dining out at expensive places.
- Learn to say no. If you find that hard, find alternatives to expensive items and experiences. The “fear of missing out” is especially common among millennials, and it contributes a lot to the debt burden. Think outside the box, and don’t succumb to social pressure. You don’t need to spend money to hang with friends or get along with them.
2) Save. Save. Save.
Many financial planning resources recommend saving 20% of each paycheck each month. Start accruing those savings and stock up your emergency funds.
- Open a savings account. It is easier to manage your money if you know how much you could spend and how much you need to save. Plus, you’ll earn interest. Here are some types of savings accounts:
Regular savings account – for beginners
- Pros: Low commitment, earns interest
- Cons: low returns
Certificate of Deposit (CD) – for long term saving
- Pros: high interest returns
- Cons: very inflexible – can’t be touched for 3 months to 5 years
Money Market Account (MMA)
- Pros: high interest, more flexibility than a CD
- Cons: limits on withdrawals
- Set a financial goal. How much do you want to set aside for emergencies? How much do you want to invest? This could help us manage our finances more wisely in order to achieve that goal.
- Create a routine of allocating a portion of your income to savings. You could set up an automatic transfer from checking to savings if that helps.
- Readjust accordingly. Are you earning more? Then save more. Some people tend to inflate their lifestyle by spending more because they earn more. Don’t fall into that trap and adjust your savings accordingly to your income.
3) Pay your debt
Start paying your debt sooner rather than later. Many college students think that it is okay to let their debt and loans sit out waiting for them to enter the workforce just because they are still in school and not obliged to pay off their debts yet. However, if you want to be free from your debts before you turn 30, it is wise to start paying your loans while still in school.
- Know who your loan servicer is and where to pay your loans
- Understand the different kinds of loans. Interest is a fee charged for borrowing money and it makes your loans even more expensive. Take advantage of those loans that do not accrue interest yet while you are in school, and start paying those that do.
- Set aside a portion of your allowance or income from your part-time job. You’ll thank yourself in the future for you will save a lot more money in the long run.
- Pay off “bad debt” (especially credit cards) first. These debts can get out of control easily.
- Some people find it helpful to pay off debts or loans of smaller value first, before they tackle the bigger ones. They feel a sense of accomplishment that prepare them mentally and financially in paying off the bigger debt.
- Don’t take on debt you don’t need. If you could live frugally or find alternatives such as scholarships, that would greatly help your financial situation.
4) Invest early
Many people tend to be so focused on the present pleasures that they often overlook their future. Think long-term, see where growth prospects are at, start investing for your retirement, and see your money grow over time. Here are some types of retirement accounts :
- Only available to people whose employers offer 401k plans
- Stashes away money from each paycheck, so it stops accumulating if you find a different job (most companies do “roll over”)
- All contributions are tax deductible
- No need to pay taxes on interest, but you’ll have to pay taxes on both contributions and interest when you withdraw
- Anyone who takes out money before 59.5 years of age must pay a 10% penalty fee of withdrawn amount and taxes on the money
- Regular withdrawals are mandatory beginning 70.5 years old
- Anyone can start a traditional IRA
- Pay taxes on deposits but not on withdrawals
- Has income limitations
- More flexible about withdrawals
Having debts could be daunting but if we know how to budget, be disciplined to save, start paying off debts and investing early could save us tons of amount of anxieties and sleepless nights, as well as prevent us from going through the dreaded bankruptcy.