Ways of Dealing With Consumer Debt
Last Updated: May 1, 2011
Debt comes in many different forms, and one of these is consumer debt. Consumer debt is characterized as debt incurred for consumption rather than investment. Some people consider debt for all other things but not investment an unwise decision. On one hand, other people believe that debt is beneficial to the economy because it increases domestic production. There will be an increase in domestic production because demand for products will increase if credit is readily available for the consumers.
Types of Consumer Debt
Credit card debt, consumer finance and payday loans are the most common examples of consumer debt. Interest rates for this kind of debts are higher than long term debts such as mortgages. The interest rates may be based on economic climate, the inflation and deflation rates, the ability of the person to pay back the debt and competitive pressures between and among the lenders.
Some consumer items may be justifiable for debt incurred, most are not. If you incurred debt for a car, then it can be considered an investment. But if you buy an air conditioner now instead of saving for it, then it might lead to a debt problem for you. That said, buying a consumer product is not necessarily an investment for you and you should buy it after you have saved for it.
Ways to Reduce Consumer Debt
You don't have to be a slave to your debt. We have put together some very helpful tips on how to reduce your debt and how to keep you from getting further and further into debt.
- Budget Your Money. The best way to reduce consumer debt is to learn how to budget your money. Learn to prioritize which purchases are priorities and which are not. Start with your "after-tax" income per month and then limit your "must-have" expenses to 50% of that figure. Those include rent, food, utilities, transportation, loans, and any other living expense. Next, allocate your "wants" to only 30% of your after-tax income. These expenses include entertainment, vacations, clothing, or eating-out. Lastly, make sure to set aside 20% of your "after-tax" income into a "savings and debt repayment" account. This money goes toward debts you owe and forces you to pay down these debts.
- Live Within Your Means. If you are earning a small salary per month, then you must learn how to live within your means. Too many of us get caught up in "keeping up with the Joneses" and live way outside of our means. You don't have to buy the most expense car or the designer label clothes if this is going to cause you to get further and further in debt. Learn how to shop smart and look for bargains - there is nothing wrong with finding a good sale! Clip coupons, shop at thrift stores, or opt for the stripped down car if it means saving money and keeping you from losing sleep at night worrying about your debt.
- Set Financial Goals. We encourage you to set attainable financial goals. These goals can help you address your current debts and how to deal with them. You just have to keep in mind that the goals you set must be achievable for them to be useful. There are a lot of free tools on the Internet that can help you set financial goals. If you feel it is too much for you to tackle yourself, you can turn to a professional financial planner. This person can set up strategies to help you pay for college, save for retirement, or just pay off your debts. Whether you use a professional or you do it yourself, setting goals is the best way to keep yourself motivated and keep you on the right track to financial freedom.
- Assess Your Spending Habits. The way you spend your money is the source of all financial problems. You must learn to cut down on "unnecessary spending" which in turn will decrease your "overall spending". If you start to assess your current spending habits, you will know where your spending problems are and this will help you deal with them.
Remember that living without debt will eliminate your "debt-stress" which will lead you down the road to financial bliss. Don't feel overwhelmed when it comes to debt. The best thing to do is to sit down, review your current consumer debt, and make a plan to tackle it head on. Without a thought-out plan, you will flounder around and not get anything accomplished. The best financial plan is a well laid-out financial plan to get out of debt!
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