Debt Sucks, Especially If It's Personal Debt
One of the largest nightsmares a person can go through would be the turmoil of going through a vicious circle of unending debt. Many of us fail to understand the process of debt reduction and simply get hung up with the thought that debt is eating up all your income and wealth. And, it is a proven fact, if you let debt grow on you, it can eat up all of your resources, your wealth and your life as well. Many of the people who file for bankruptcy in the nation are ones that have finally given in to the tormenting cycles of debt and have been unsuccessful in the debt reduction process.
Be Aware Of How The Debt Works
What makes debt reduction such a complicated process is that most of us are not aware of some simple money management tricks. Consider a simple example, where you have a loan of $ 10,000 on a credit card and another $ 10,000 as a personal unsecured loan. Assume that the monthly repayments on the personal loan are about 500 dollars and the minimum due on the credit card is about 200 dollars. When you keep paying the 200 dollars every month on the credit card, you would be surprised that the reduction in principal is negligible. Here, sometimes loans with compound interests like credit cards would need to be cleared first, then unsecured personal loans, then educational loans, then utility loans and finally mortgages and business loans.
Understanding the simple logic behind clearing a debt and implementing the same with discipline are vital in the debt reduction process. Another important measure to reduce debt is to consolidate all your debts with one major debt. By going for a mortgage loan, or a loan with lower interest rates, you could consolidate your debts and hence reduce the burden of interest. There are a range of mortgage loan calculators to work this out for you.
If you are unsure about the options its best to start with paying off extra on the highest interest rate loan first. This has the faster effect to reducing your overall debt. After using all your repayments to pay off the largest debt, target the next big loan. This has the effect of saving you interest as the smaller debts will not accumulate as much interest as a larger loan even at a lower interest rate. This has the effect of snowballing as every debt you pay off frees up more money to pay off the next loan. Once you are debt free the next question may be, Should I start a savings account that earns interest?