The Secret to Eliminating Financial Stress
Financial stress can come from many corners, but one tends to keep us up at night more than others: debt.
Whether it’s credit cards or a loan you can no longer afford, unsustainable or non-productive debt is a major drain on both our finances and our energy levels. But knowing what to do about it can be difficult – especially if you’re already in the throes of stress.
Here’s how to make a plan.
First: Recognize how important it is
Debt doesn’t just reduce your current income: it can depress your net worth for years to come. That’s because whenever you carry debt, you’re not just making payments what you owe: you’re paying interest.
In other words, instead of earning money and building wealth, you’re continuing to spend it. By contrast, if you use those same dollars to save and invest, you’d have the potential to earn a return and make more money.
This is incredibly important for long-term wealth building.
Let’s say you have $3,000 in credit card debt that’s costing you 18% a year. That’s $540 a year that you’re paying just to carry a balance on your card (obviously this is a simplified example that doesn’t take into account payments or changes in interest rates).
Depending on your individual situation, over the course of a few years you could easily spend just as much on interest payments as you did on the original charges.
Pay off your debts and set that money aside, and you could watch your net worth grow instead. That’s the choice you make when you prioritize debt payments: the difference between growing your long-term wealth and keeping it down.
How to start
The key to starting on a new path is to make paying your debts a top priority. This simply needs to take top billing, especially if your interest rates are very high.
Of course, this may require some sacrifices and a rethinking of your budget. You’ll want to allocate more to your payments than the minimum, which can be painful if it means less money to spend elsewhere. But the extra money you pay will help reduce the debt faster, which could save you a lot of money over time.
You don’t have to sacrifice everything: keep in mind that every little bit counts.
That extra $10 might seem like a pointless addition to your payment, but it isn’t. Later, if you can find another $10, or another $20 or $50, add it on. These little steps seem insignificant, but that’s what makes them so powerful.
Added together, they can and do have an effect.
So, take a critical eye to your budget and do everything you can feasibly manage to maximize your payments.
Work with your lenders
Your second step is to call your lender to find out if you can negotiate a lower interest rate or otherwise restructure your debt so that it’s cheaper for you.
This is especially important if you’re having difficulty managing your payments and just cannot find the extra room to maneuver a higher one.
You might be surprised at how willing your lender is to work with you – that might mean a promotional interest rate while you get back on your feet or just a lower one based on your credit history.
Similarly, if you have good credit, you could consider moving your credit card balance to a zero-interest card. This could buy you some breathing room when it comes to the cost of your debt.
Just don’t stop making payments: lowering your debt as quickly as possible is still extremely useful, especially if you can eliminate it before interest charges start up again.
Plan for the future
Depending on how you got into debt in the first place, consider what you can do to avoid the same situation in the future. Maybe you had some emergency expenses that you hadn’t planned for, or maybe you lost track of your budget.
Whatever it was, don’t kick yourself for it now. Just acknowledge what happened so that you can make a better plan for yourself for the future.
We all have our struggles when it comes to finances. The most important thing you can do is to acknowledge that you’re trying and to find a system that works with you rather than against you. Maybe you need to get a clearer look at your spending, or perhaps it would be helpful to start building an emergency fund so that you don’t have to turn to a credit in times of need.
If you’re not sure what you can do and you need some advice, consider speaking to a qualified financial advisor. An advisor can help you get a clear picture of your financial life and find ways to make your finances more sustainable – helping you build both wealth and a happier quality of life.