It is surprising how often you find people who are burdened by their debt are also only ever focused on paying off their debts. This doesn’t seem like a problem until someone points out that this methodology fails to incorporate the bigger picture of personal financial management. So before you can fix a problem you need to work out what caused that problem in the first place. This is the first step to help with debt relief.
Debt is usually a result of either two scenarios. Scenario one is living beyond your means by relying on credit to pay for things your actual income cannot afford. Scenario two is irresponsible handling of your personal finances. In order to resolve these issues you first need to utilize money management.
There are different solutions for resolving debt, including debt consolidation, debt settlement or debt management. But what many people do not know is that money management is a part of all structured debt relief programs. So regardless of which debt resolution method you use, you first have to start by finding out what you have been doing wrong.
3 Financial Management Concepts You Need To Learn
Before learning how money management can help with debt relief we must first learn about core money management concepts.
1. Implementing A Budget
The first, and most important, concept is how to create and implement a budget. A budget is the most obvious way to manage your money and finances. It will have you consider your income versus your expenses and will demonstrate whether or not the former can cover the latter. If your expenses do outweigh your income then you are charging too much to credit. Whatever you charge to credit must be paid off in full each month. A budget will help you to define your expenses, what you really need versus what you just want and help you to know if your money management is keeping you out of debt.
2. Increasing Your Savings
While a budget is for securing your present finances, your savings is for securing your future finances. Life likes to throw us some surprises here and there, and nothing is for certain. So you want to make sure that you have money saved up to finance those surprises or emergencies that life will throw your way because you want to be able to pay for it without going into debt.
3. Make Smarter Spending Choices
Smart spending isn’t just about only spending money that you have rather than going overboard in credit. It’s also about not spending so that you can save the money for other purposes. Likewise, it’s not about spending money only on cheaper items or lower quality products to save money but finding the best value for money and prioritizing where spend more on quality. In fact, smarter spending habits have shown links with greater wealth. People with an income around $150,000 are more likely to collect coupons than those who earn less.
Managing money itself is very simple, very logical, and very easy. What isn’t simple, logical and easy is the human factor; your own attitude towards money management is the biggest setback. But why? Because when you begin to seriously manage your money, it is going to highlight and force you to correct all the mistakes that put you into debt in the first place. Our great-great grandparents got by with a lot less than we did, because they bought quality and they knew how to maintain what they had. In todays consumerist culture we are so used to replacing things rather than trying to fix them or trying to find ways around. Therefore, we are so used to spending in excess that we have to change our impulses and habits when it comes to spending.
7 Ways That A Well Managed Finances Can Lead To Debt Freedom
As you begin managing your money, you are not only managing and changing your habits, you are also working towards getting out of debt, or preventing yourself from getting into debt. So here are seven ways that better money management can free you from debt.
4. It Provides You An Overview Of Your Financial Capabilities.
Firstly, there is the overview. At one glance a good financial management plan will let you see where your finances are currently at. At one glance you can see if you are spending more than your income is bringing in. And at one glance you can see how much you can afford to put towards debt repayments.
5. It Guides You To The Right Debt Relief Program To Pursue.
Now that you know roughly how much money you can afford to put towards debt repayments, you can work out the right debt repayment relief program that will work for you. And if you cannot afford your usual payment amount, you can then purse debt settlement to reduce the balance. Or if you can afford your usual payment amount but don’t want such a restricted budget you can purse debt consolidation. Only then once you have got your overview and assessed what you can afford, can you then decide if bankruptcy is the right option for you.
6. It Allows You To Set Aside The Money To Fund Your Debt Payments.
No matter what type of debt you want to get rid of, student loans, credit cards etc, you need to make sure that the debt repayment fund will always have enough money. And this is where your money management plan will come in handy. Through a budget you can make sure that your debt fund will always be supplied and you can set out the amount that will go to your creditors.
7. It Helps You Shift Your Expenses To Make Way For The Spending Priorities.
Once you start spending smarter and revisit your budget you will find you have more money to add to your debt repayments. Not only can you increase your debt repayments but you can then also reshuffle how your money is allocated to finance any other priority expenses.
8. It Keeps You From Incurring More Debt.
The three concepts of money management outlined earlier are all used in this strategy. Your budget will allow you to work out what you can afford and what you cannot. Smart spending will help you work out if you actually need to spend the money on something. Your savings are your safeguard against any emergency situations and sudden expenses.
9. It Gives You The Data You Need To Make Smart Financial Decisions.
Once you start managing your money and you can see your financial situation at a glance you can then see how any changes, like additional expenses or loans will affect your financial standing. Therefore, you can make smarter and more informed choices about whether to continue with a purchase, expense or investment. This will ultimately save you money. Smarter spending choices like dining out at a nice restaurant for lunch instead of dinner can save you up to 25 percent. Better financial management like this will leave you with extra money to add to your debt repayments.
10. It Tells You If You Need To Earn More Money.
Last of all, keeping a close eye on your money management will let you know if you need to earn more money to afford your debt repayments. You will be able to see if your expenses plus debt contributions each month can be covered by your current income. If not, then you will need to reassess your budget and find a way to increase your monthly income.
With a budget and smarter spending you will find you have more money to contribute to your savings and to repay your debts. A budget is a great tool but without smart spending habits you won’t have a complete money management plan.