Succeeding Despite Being Under Massive Debt
It is very easy to accumulate massive debt in today?s society. With numerous companies pushing pre-approved lines of credit just to sell their products and services, saying no becomes difficult. Especially when products or services are advertised in a way that makes it sound as if one can?t exist without them. Unfortunately, the access to easy credit combined with the state of the economy has resulted in the number of personal bankruptcies being filed to be at an all-time high. Being in debt is not a pleasant prospect as it is emotionally and financially straining. It limits one?s ability to meet their daily obligations and invest in one?s future. It also puts strain on personal relationships and raises a host of other issues.
To be able to get out of debt requires a thorough understanding of three main elements. The first thing is to understand the different types of debts there are. Then one needs to get a grasp on the circumstances and the psychology which led one into the debt and finally create a plan to effectively reduce the debt and increase savings and wealth.
Essentially, debt can be separated into two main categories:
Investment debt, which is taken to generate cash flow and increase wealth. It makes use of other people?s money to build one?s own assets. This would include mortgages, business loans or stock margin loans. This type of a debt produces positive cash flow.
Consumer debt means buying items on credit that have no significant resale value and generally decrease in value as soon as they are purchased. This would include car loans, credit card debt, personal lines of credit, etc. While a risky method, this type of debt is good only if the after-tax return on the debt is more than the interest rate of the debt. This happens rarely, so this approach should not ideally be used when one is trying to get out of massive debt. It should be realized that one person?s consumer debt is another persons investment debt, which is why it is not good having this type of debt.
In order to eliminate a debt it is important to understand what led to it in the first place. For example, one should examine if the debt is due to medical expenses, a failed business or unnecessary purchases of too many consumer goods. Once the problem is singled out then it can be faced. If the debt is incurred due to excessive spending on consumer products, than one has to figure out why they are living beyond their means. If it is due to unavoidable emergencies, then one must discipline themselves and build a fund for such expenses over a period of time.
The most efficient method of eliminating debt is to make use of a two-step strategy. The strategy should involve budgeting and prudent investing. This step in a debt free process is to write down the total amount owed to each creditor, the amount of interest and what the monthly payments come to. The next step is to call each creditor and ask them to lower the interest rate or try to transfer the debt to one of the cards with lower rates of interest. If this is insufficient, then liabilities can be converted to loans with lower interests by using refinancing. This type of debt has the added benefit of being tax deductible. In order to be successful in eliminating massive debt one must make a realistic budget and eliminate all expenses that are not absolutely necessary. Any extra cash should be used to pay off the debt with the highest interest, while only the minimum amounts should be paid on the low interest debts.
The second part of the strategy is to eliminate any debt that requires investing in places where the return is less than the interest on the outstanding debt. Since investing can also lead to losses, it is best to use the services of a professional in this field.
Massive debts are never accumulated overnight and expecting them to be eliminated the same way is unrealistic. In more extreme cases, it may even become necessary to get a second job to pay off the debt. The only way to get rid of debt is to stick to the planned budget and invest with care and in time the problem will be resolved.