The Amateur Financier

We are now at one of the most tricky spot in personal-finance, debt management, something that gives a great number of people quite a bit of trouble. But if you do it right, you will save yourself a great deal of time and aggravation.

Manage Your Debt

There are many different theories as to how much debt is acceptable. Some people, like Dave Ramsey, believe that you should do everything in your power to remain debt-free. Others, such as Robert Kiyosaki, consider debt, even substantial debt, to be necessary part of building your financial future, something you can’t do without if you hope to retire rich. And of course, there are many opinions that fall in between these two extremes.

Regardless of which tactic you prefer, it’s important to know how to manage your debt in a way that will keep it from overwhelming you. If your amount of debt continues to rise beyond what you have the capability to manage, it can overwhelm you, wrecking your financial goals and your life.  (That’s one reason I came forward with my current debt issues before they got to be too overwhelming.). So we’re going to go over a few tips to help you keep your debt under control.

Controlling your debt

The first step in managing your debt is knowing where you stand. You need to take an honest inventory of your current debts and obligations. It might be painful, but it’s important that you know what you owe, whom you owe it to, and how much interest you’re being charged in order to know how to get out of debt.

Once you know where you stand, it’s time to work out your plan. There’s a variety of techniques you could use in order for you to get out of debt. I’ve covered several of them previously, even comparing their effectiveness, but it’s worth a quick review.

The most effective technique is to pay down the highest interest debt first and then go to the next highest interest debt, pay that debt down, and so on. This has the advantage of being the most efficient means of paying down your debt. Dave Ramsey, on the other hand, favors paying down the lowest balance debt first. While not as financially efficient, unless of course your lowest balance debt also happens to be the debt with the highest interest rate, it does have the advantage of a quicker repayment of the first debt, giving you a psychological boost as you attempt to pay down your other debts.

Rather than spending too much time worrying about which is the most effective or “best” method, it will be much better for you to simply begin paying down your debts in whatever fashion you prefer. Put extra money (beyond the minimum payments, which you should be making for all your debts) toward one of your debts, and you’ll slowly wear down the debt and eventually eliminate it.  Keep doing that for all the other debts, and you’ll soon be debt-free (or at least, free of non-productive debts like credit card debt).

I realize that all of this is easier said than done, as there will be no one in uncontrollable debt if repayment was as simple as I make it sound. Obviously, the psychological element is very important as well. In order to have the willpower to eliminate your debt, you need to have as much encouragement as possible. If you are married or in a committed relationship, your spouse or significant other should be able to provide you with support. Other members of your family or your friends can also serve to help support and encourage you in your debt elimination goals. And of course, there’s any number of personal finance writers and bloggers whom you can read to gain encouragement. (Many of them, myself included, will gladly accept e-mail describing your challenges and attempt to provide you with whatever help and encouragement will enable you to succeed.)

Good debt versus bad debt

There is much discussion about the concept of good debt and debt. While there is general agreement that the worst debt is debt taken on to buy goods that decline in value, such as taking on credit card debt to buy consumer goods, there is more disagreement on whether there is such a thing as good debt. Mortgages and college loans, for example, are used to acquire goods that grow in value over the years. Some commentators, such as the aforementioned Kiyosaki, considered it perfectly acceptable take on such debt; others, like Ramsey, believe that debt should be avoided at all costs.

Which position you take is going to depend on your personal beliefs and values. I can’t tell you which will be the best position for you, but regardless, any debt you do have needs to be treated with caution and kept under control. If you find your debt increasing, or it’s getting harder and harder to make the needed payments, you should take a step back, reconsider you need for that particular debt, and if needed, stop adding to it and start trying to eliminate it.

That’s all very really is to know about debt. It’s not really that hard a concept, although fully getting a handle on it does take time and effort. Here’s to both you and I getting out of debt as soon as possible. Cheers!

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