How to manage your debt
Making a loan or borrowing from a bank has become a part of one’s financial life. Sometimes you are “forced” to borrow from a bank to purchase assets such as a house or a car. Although a debt in itself is not necessarily a bad thing, acquiring too much debt is. Therefore it is wise to manage your your debts well to avoid getting into financial trouble in the future.
Assessing your debt level
It is a good idea to to find out if you are in too much debt. The simplest way to do this is by calculating your debt-to-income ratio (DTI).
Debt-to-income ratio = (Monthly fixed loan repayment) / (Gross monthly income)
It is the percentage of a your monthly gross income that goes toward paying your debts.
Bear in mind that your debt-to-income ratio will affect your credit rating or score, as such creditors will look at the ratio to see how good or bad your financial status is on a regular basis. In general, you would want to keep the ratio below 36 percent -a threshold that loan officers and credit card issuers often use as a factor when they determine how much they're willing to lend you.
Control your debts
To stay in control of your finances and debts, here are some tips for you to follow:
- Borrow selectively
Borrow only if you can afford to pay back, with your current income. In calculating your affordability, make sure you take into account the additional expenses associated with the loan. For instance, if you are planning to buy a car, you should also consider petrol, toll charges, and maintenance expenses.
- Minimize your credit cards charges
Try to pay your entire balance each month to avoid finance charges (interest). Interest charges are higher for outstanding credit card balances than that charged on conventional loans.
- Pay down your loans
If you have excess money (from bonus etc.), pay down your loan to save on interest charges.
- Use automatic payment methods to pay bills
Consider some forms of automatic payment methods such as standing instructions. It will ensure you pay your bills on time and avoid late payment charges.
- Make a budget
Establish a budget and stick to it. This will help you track your expenses and prevent overspending.
- Build your savings
Savings will help you avoid borrowing for minor purchases. Also set an emergency fund to pay for your living expenses should you be temporarily out of a job.