Debt is not necessarily a bad thing. Sometimes we need or want to make a purchase but can’t pay in full up front. Credit can enable us to buy now and pay over time. But when we take on too much debt, it can have a negative impact on our lives.
When debt becomes too much to handle, the first thing we need to do is stop taking on new debt. Then we must find a way to pay off the debt we owe. This can be accomplished with a debt management Plan.
In its simplest form, a debt management Plan is a budget that focuses on paying off loans and credit cards. It usually reallocates money to make more than the required payment on each debt, allowing us to pay them off more quickly. This frees up more money for savings and everyday expenses and saves us money that would have gone toward interest.
Those who do not have enough money in the budget to increase payments to creditors may choose to negotiate with them. Creditors are often willing to accept reduced payments or lower interest rates for those who are having a hard time making ends meet. They reason that by making terms more favorable to the debtor, they decrease the chances of him filing bankruptcy or simply ceasing to make payments.
Credit counseling services can help debtors establish a debt management plan. They negotiate with creditors on the debtor’s behalf, usually getting lower interest rates and payments than the debtor could have gotten on his own. Once negotiations are complete, the debtor sends one monthly payment to the credit counselor, who forwards the appropriate amount to each creditor.
Credit counseling agencies do charge fees, but they are usually taken out of the creditors’ money. Creditors agree to this because those who participate in such programs are more likely to pay their obligations in full.
Those who participate in formal debt management plans are usually required to abstain from using old accounts or opening new ones until the program is complete. A note also appears on their credit report stating that they are undergoing credit counseling during this time. But when all debts have been paid off, the note is removed and it no longer affects their credit. If you work out your own debt management plan, there is nothing stopping you from obtaining new credit. However, it’s much easier to pay off old debts when you’re not acquiring new ones.
A debt management plan can help avoid bankruptcy by allowing debtors to make payments that fit into their budgets. Creditors benefit because they can collect all or most of the principal owed plus interest, and debtors benefit because they do not end up with a serious blemish on their credit records. If you’re having trouble making payments but could manage if those payments were lower, a debt management plan could be the answer.
Wants versus Needs: Learn to Prioritize
There are two basic categories of things we spend our money on: needs and wants. Needs are things we must have to survive, such as food, water, shelter and clothing. Wants are things that we would like to have, but we would not be worse off without them.
In theory, this is an easy concept to understand. But in practice, it’s rarely that cut and dried. When we see something we really want, we often rationalize getting it by calling it a need. While there’s no harm in buying things we want if our needs are taken care of, it’s this type of thinking that often spells trouble in the long run.
The Gray Area
Separating wants from needs is complicated by the fact that some of the things we want are quite similar to the things we need. Consider food for a moment. We need calories from it to sustain ourselves. We also need nutrients, vitamins and minerals found in a variety of foods to support our body’s functions and stay healthy. But do we need expensive gourmet ice cream to survive, or dinner at a fancy restaurant once a week?
Transportation is another area where wants and needs may be blurred. If we live within walking distance of our jobs and stores where we can buy necessities, no transportation except our two feet is necessary. If not, public transportation might be What we need to get us where we need to go. For those who live in rural areas or work many miles from home, however, a car might be a need. But while a $60,000 sports car would meet our transportation needs, a less expensive model would meet them just as well.
Today’s society has placed a great deal of importance on having the latest and greatest in everything. But in order to prioritize effectively, it’s important to put that notion aside. In reality, we do not need nearly as many things as we think we do.
Telling the Difference
Sometimes a conscious effort is required to separate wants from needs. This is especially true if you’ve gotten into a habit of buying impulsively without giving much thought to whether or not you need something. But if you make it a point to analyze each purchase, it will become second nature.
When you are about to put something in your shopping cart, stop and think about it for a moment. If you consider the item a need, What aspect of your survival do you need it for? Is there something else that would suit that purpose just as well or better? If so, why do you need the item you chose? In many cases, you’ll find that you really didn’t need it at all.
Learning the difference between wants and needs is essential to gaining control of our finances. By putting true needs first, we can reduce spending and have more money to put into savings. We don’t have to completely give up our wants, either. As long as there’s room in the budget, indulging every now and then is perfectly fine.
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