Having a large amount of personal debt can be frustrating. Like any big problem, it can be difficult to visualize a process for getting out of debt. The Greek debt crisis serves as a cautionary tale about debt. We can all learn from the mistakes made by Greece.
The sooner you start, the better
Start planning to manage your debt as soon as possible. As a borrower, time is working against you. That’s because interest is compounding everyday.
The Wall Street Journal explains that the Greeks must accept “even-tougher versions of the measures (they have) opposed for months- such as cuts to pensions and increased sales taxes.” The Greeks now must accept a more demanding plan than they rejected overwhelmingly in a July 5th national referendum.
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The sooner you start, the sooner you can reduce your debt- and interest on that debt. To prove it for yourself, try this interest calculator. Plug in a dollar amount and due date for the debt. Now, use different interest rates and calculate the payments. You’ll quickly see the impact of interest on debt repayment.
Plan a realistic budget, and stick to it
The Greek debt crisis has been building to this point for years. Their economy has declined sharply in recent years. The country has over 20% unemployment, and large pension obligations.
Greece’s situation illustrates the need to have an “adult conversation” about your spending habits. Like the Greeks, there may be spending habits that you need to change. The spending needs to change, because it’s not sustainable. In this case, the level of Greek pension payments is not sustainable, given the region’s economic conditions.
Discretionary (optional) spending is the easiest to change. For example, say you go out to dinner three times a month. You cut back to twice a month. Rather than buy a latte each morning, you switch to black coffee a few days a week. These small changes can make a big difference.
After discretionary spending, try to allocate money to the debts with the highest interest rates. As you pay those debts down, you’ll get rid of the maximum amount of interest. This strategy will give you the best bang for your budget buck.
Don’t let the perfect be the enemy of the good
This is one of my favorite sayings. You don’t need software to manage your budget. There are some great tools out there. Quicken, for example, is an easy-to-use tool that has been around for years.
The point here is to create a budget and use it- in whatever form works for you. Use notebook paper, if that’s easy for you. Any system that you’ll stick with is a good system.
You can work your way out of this
If you decide to plan (and get help, if you need it), you can absolutely dig out of any financial hole. It may be hard to face reality and start the process, but it can work for you.
Do you know someone who had a strategy for getting out of debt? I’d love to hear from you.
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