If debt is causing anxiety, it is time to analyze the debt and determine how to ease the stress it has created. Such analysis should include the following steps:
- List each creditor and the amount of debt.
- Separate out the debt that is “good” and “bad.” Good debt would obviously include a mortgage, because you are building equity and value in the purchase of a home. A car payment can be considered good debt if the plan is to continue driving the same car once it is paid for. Bad debt is usually credit card and other revolving debt that is not building equity or value.
- The bad debt is the debt you need to reduce by changing your financial habits.
- Impulse Buying: If you frequent stores and malls, you are much more likely to engage in impulse buying. Window shopping becomes actual shopping once you are enticed into a store and come upon items you simply cannot “do without.” The cure is to stop going to stores and malls and to fill your leisure time with inexpensive activity.
- Shopping Without a List: Each time you go shopping you need a list. This includes any trip to the grocery store, the drug store, the local discount store, and even the hardware store. Purchase only those items on the list, nothing more.
- Keeping Credit Card Balances at the Maximum Limit: The biggest temptation for poor financial managers is to keep balances at the high limit. Because the debtor is used to the monthly minimum payment when the balance is at its high limit, it is easy to purchase additional items when the balance gets below that limit. There is no pain so long as the monthly payment does not increase.
- No Savings Plan: Most people who have high debt have no savings. Saving something each month, no matter how small an amount, is tantamount to developing the habit of always putting something away that will not be used. If there is a savings plan at one’s workplace, this is the best form of savings, because often it is matched in some way by the employer and it is difficult to get to when the impulse to buy hits.
- Making Only Minimum Payments: This is the worst practice of all. Making minimum payments on credit card and revolving debt means years of continued debt balance and high interest rates. Nothing is more wasteful. Vow to chip away at these one at a time, dumping as much as possible on this debt.
- Buying Large Ticket Items When Not Necessary: A new couch, refrigerator or high-definition television would be great to have, but buying these items without saving for them first can create payments that extend for 10 or more years, long after the item has worn out. This is bad debt at its worst.
- Using Equity in a Home to Pay off Items with a Shelf Life: Many people re-finance their homes in order to consolidate debt. This is a wise idea if the debt is too cumbersome to manage, and there is the concurrent commitment and self-discipline to cease the irresponsible spending. This is not a wise idea if one is going to pay off debt to begin all over again. Thank about it. Does it make sense to put a car loan into a home re-finance? You will still be paying for that car long after you have purchased a replacement vehicle and incurred another car payment.
Changing your financial habits is not easy. It is a little bit like an alcoholic who must stop drinking. You do it daily, by making conscious decisions not to spend money on frivolous and unnecessary items and to put your excess into paying off current debt and savings.