Guaranteed ways of managing bad debt more effectively
Updated: Apr 1
These surefire techniques will allow you to become more functional in managing your personal bad debts.
Debt is a concept used to explain money that’s borrowed from one entity to another. People acquire debt when they need to purchase something that’s worth more than they can pay for upfront and in cash.
There are two types of debt: good and bad. Traditionally, people were made to believe that all debt is bad and should be avoided. However, this belief is ancient and you will see why below.
Good debt: Good debt is debt that can help you purchase wealth-building assets. These are assets that appreciate. Some good debt is also tax deductible. An example of this is when you borrow money to purchase a home or investment property.
Bad debt: As you can probably guess, bad debt occurs when you borrow money for assets that depreciate. They will not earn you any monetary value and aren’t tax deductible. Examples include buying luxury goods and borrowing for holidays.
So the next time anyone from Generation X or older tells you all debt is bad, you'll be able to roll your eyes and say, "okay boomer."
In this article we’ll be exploring bad debt. Furthermore, we’ll be sharing techniques for managing bad debt or avoiding it in the first place. When you gain control of your finances and know how to manage bad debt you can put yourself in a position that allows you to be looked upon more favourably to acquire good debt.
Finance management techniques for debt
If you’re in a position where you owe money for bad debt, there are several techniques that you can implement to allow you to manage it a lot better. They can help you to improve your financial wellbeing and take greater control of your situation.
Technique One: Determine the total value of your bad debts
This one goes without saying. If you have several personal debts that aren’t going to produce you long term monetary benefit, you need to sit down and determine the total value of what you still owe. This can help provide you with clarity on what you need to do to pay off your debt and how long it’ll take you to get there.
Technique Two: Compare your income and expenditure
This is budgeting 101.
When you’re looking at ways to manage your debt you need to compare your earnings, owing’s, and spendings. This can help you to understand the total income you’re producing and how you’ll allocate it towards what you owe.
Once your debts and essential expenses are accounted for, you should then determine what percentage of your income is being put towards non-essential expenses. This is important for prioritising this expenditure towards paying off your debts quicker, instead.
Technique Three: Determine what you can make in extra repayments
Following technique two, you may also consider using your left over non-essential spending funds to make extra repayments against your owing’s. This can help you to reduce your interest over time, saving you potentially thousands of dollars in the long term.
To make extra repayments you need to be able to afford it. Additionally, you need to review the conditions of your loan. Some lenders may charge you for paying your debt early, so make sure that you check with your lender or finance specialist before doing so.
Technique Four: See if you can consolidate all your debts into one
Debt consolidation is a brilliant technique that allows you to gain greater control of your financial situation. When people take out various loans from a range of lenders it puts them in a position of paying more in interest fees than required.
When you refinance your mortgage loans (good debt), you may consider talking to a finance specialist about consolidating all your debts into one. Not only will it help you manage your repayments much easier, but it’ll help you shave off unnecessary high interest.
Technique Five: Make repayments on time
If you can follow the first two suggested techniques, you’ll have implemented basic structures that’ll allow you to prioritise your repayments. When you acquire any debt (good and bad) it’s imperative that you make your repayments on time. Missing payments can result in further hefty charges. Doing so can also result in defaults against your name and affect your credit score.
Technique Six: Have a plan in place, in case rates rise
If your loan rates are not fixed, it’s important that you have a back-up plan in place in the instance of rate rises. As the broader economy fluctuates regularly you need to think about what you could do when rates could rise.
Technique Seven: Use bonuses to pay down debt quicker
If you receive cash bonuses or lump sum payments from your employer, it may be worthwhile using this to pay down your debt quicker. Like making additional repayments, ensure that you will not be hit with penalty fees for paying your loans earlier.
Techniques for preventing bad debt
These techniques kind of go without saying. If you want to avoid/ prevent putting yourself in a position of acquiring bad debt you should:
Not take on debt that you know you will have difficulty repaying
Be able to implement the above listed management strategies when you take on bad debt
Consider what long-term value it’ll add to your life. If it doesn’t, reconsider whether you really need to borrow funds
Talk to a finance specialist
For more information
REIF Finance Specialists are helping a range of clients with debt consolidation and acquiring smart finance solutions for diverse individual needs. If you’d like to review your financial situation, click below to book a free financial consultation. We’re always happy to help!