Getting your household debt situation under control is a must. There are just so many things that can go wrong when you have debt in the picture. And you don’t want to compromise your finances because that will have a huge effect on the quality of life that your family will enjoy.
But if you look at the current statistics about household debt, it is hard not to worry about the financial state of Americans. The New York Federal Reserve revealed that the total household debt has reached $12.15 trillion by the end of 2019. That is a lot of debt to pay off.
The report revealed that the majority of the debt involves mortgages. This is good because it means there are more homeowners. The fact that these people own properties means their net worth is growing – or will grow as the equity of their property increases.
While that should be good news, it can still be overwhelming. When credit card debts are added to the mix, it all gets a little bit more chaotic.
Does this mean you should stop using debt? Not really. In our society today, it is quite hard to do that. But if you have to use debt, you need to learn how to be smart with it.
3 tips to control your household debt situation
The key to keep your household debt situation under control is to get to know more about it. Education is the first step to controlling something. You have to understand debt so you will know how it can affect your life. For instance, did you know that paying your credit card balance in full within the grace period will keep you from paying any finance charge? That means it does not matter what your interest rate is. Your payments will not be affected because you will only pay the amount that you paid for the purchase.
That’s good news, right? You can use that to your advantage and keep yourself from paying the interest. But what is the grace period? That is another question that you need to answer.
There are several other credit issues that you need to familiarize with to understand debt better. Once you do, it will be easier for you to use debt without endangering your personal finances.
Here are three things that you can do to keep your household debt situation under control.
Align it with your budget plan
If you don’t have a budget plan yet, you need to create one. You can never manage your household finances successfully if you are not using any one of the many budgeting strategies. This is a must if you want to be more responsible with your finances. A budget plan will give you an overview of your financial transactions. It shows how much you owe and more importantly, where it all goes. If your expenses are more than your income – that is what’s causing you to be in debt.
But more than having a budget plan, you should also make sure that it is current. It has to be aligned with your current lifestyle. That means the amount stated in your budget categories (e.g. food, groceries, utilities, transportation, etc) should be the amount you spend in real life. For instance, your budget for utility bills is $400 a month. But in reality, your consumption makes you pay for $500. Where does that $100 come from? What expense are you getting it from? If you are getting it from the food and grocery budget, what will happen when it’s time for you to go on your shopping errands? How will you pay for it? Most likely, you will take out your credit card and use it to pay.
Don’t let this happen to you. Create a reasonable budget that is aligned with what you are really spending. Once you have done that, use this budget as your guide when it comes to spending your money.
Use credit with a purpose
Controlling your household debt situation does not necessarily mean you will completely eliminate debt from your life. On the contrary, you need to keep using debt. But this time, make it a habit to use credit with a purpose. If it is not necessary or if it will not lead you to gain something positive for your finances, then think twice before spending. Get into the habit of justifying your credit purchases. Argue with yourself about this expense. Is this really important? Is it worth paying the interest for?
For instance, some would say buying new clothes is not as important as food. But what if you will use it to apply for a new job? As long as it’s a one-time expense, then it’s justified. However, if you are buying clothes just for retail therapy, then that is not an example of using credit with a purpose.
Establish your own credit limit
According to one survey, 37% of their respondents admitted that they have maxed out their credit cards. When you reach this point, it is harder to pay off your debts in full because having it reach your credit limit means it’s already a big amount. And whatever balance you cannot pay will be carried over to the next billing cycle. When that happens, the finance charge will be added to it. Since credit cards have a high-interest rate, you can expect that the charge will be huge. Trying to get ahead of that can be hard. Not to mention the fact that maxing out your card will result in penalties and charges.
Obviously, you want to avoid maxing out your credit limit to keep your household debt situation under control. To avoid this, you need to set your own credit limit. And this limit should not be based on the limit stated in your credit account. It should be based on your capabilities to pay it back. If your monthly budget can only afford $300, that is your credit limit. If you stick to this, you will not have a hard time managing your finances at home.
Effects of your household debt situation
Why is it so important for you to manage your household debt situation? There are three areas that can be affected by your debts.
When your debts are out of control, your spending power is compromised. Your limited resources have to be shared with your debt payments. Instead of being able to use it to buy things that you need around the house or pay for unexpected expenses, it has to go to your creditors. But if you have it under control, your monthly bills payments will be easier to meet. Everything will be paid for and nothing will have to be sacrificed.
Your household debt situation will also have a huge effect on your financial future. If you want to make it secure, you need to start working on it right now. Give your investments a boost. Have enough emergency funds. Improve your personal assets so you can be financially stronger. All of these are needed to establish a positive financial future.
But if you have debts, that can compromise your ability to reach all of these. Just like your spending power, your finances will have to be shared with debt payments. While you can still save, it will not be as much as you could have done if you had no debts.
Finally, your emotional stress will also be heavily affected by your household debt situation. A lot of consumers admitted that debt causes them to feel stressed. Couples say that they argue about their finances every now and then. In fact, some even end up divorcing because of money issues. Since uncontrolled debts bring a lot of negativity in your home, it can be assumed that the money issues involve a lot of credit.
When you are stressed, your health will suffer. There are also times when the negativity that you feel will translate into how you relate to your partner and kids. This can cause tension and strained relationships.
If you want to maintain peace and have less stress, make sure you keep your household debt situation under control. Your home should be a place of rest and space where you can be free to be happy. Debt can ruin that. So make sure you have a tight grip on your use of credit at all times.