Household Debt Management with Budgeting and Other Methods
Household Debt
Managing household finances is a task that touches everyone, irrespective of their income bracket. Different things influence this, like missed mortgage payments, credit card balances, auto loans, etc.
All the outstanding debt from different family members into a unified total household debt can cause much stress for a family.
Thus, preparing a debt management plan for the whole household is essential in financial planning. This guide will cover family debt, budgeting, strategies to remove total household debt, and more.
Household Debt- Overview of How Debt Impacts Families
Household debt is the combined debt that family members have altogether racked up over time.
These consist of debt incurred from different sources like credit cards, mortgages, personal loans, and consumer loans.
Fluctuations in financial markets are commonplace. But that can badly affect the lifestyle of regular people.
Families start getting dependent on credit to manage their expenses during this financial strain.
Low-income households suffer the most in such a situation.
People do not have full job security in the current working environment due to issues like benefit cuts, zero-hours contracts, etc.
As a result, household income is getting lower, but the expenses are growing. Families fall further into debt and have trouble controlling their finances organically.
Meaning of Debt Management
Now that you have an accurate picture of family debt basics, it is best to focus on how to control it.
Debt management is a debt relief method that can help you improve your financial situation with proper budgeting and planning.
You can prepare your own debt management plan to manage all monthly payments towards active unsecured debts, like personal loans and auto loans.
It is better to get professional credit counseling help to customize your debt management plan.
The credit counselor from a top non-profit credit counseling agency will understand your financial habits and help you with budget planning.
They will also support you during negotiations with creditors for adjusting debt repayment timelines or rates.
With these long-term budgeting tips and strategies, you can reduce your current household debt levels, get closer to eradicating it, and avoid acquiring more debt.
Uses of Budgeting to Manage Debt
The main element of debt management plans that benefit debtors is the revised budget plan.
Indeed, setting a reasonable budget will help you organize your finances and due payments.
This makes it easier to manage debt repayments and plan priority expenses.
Here are some reasons why budgeting is necessary for family debt management.
- Controlled spending- Making informed purchases is more accessible with a well-curated budget. This way, you can avoid overspending and only use your disposable income for necessary things.
- Financial awareness- You must research your financial situation more deeply while creating a budget. This includes learning things like your credit history, debt, available credit, etc. You will also see what areas you spend the most money on. Such awareness will allow you to cut unneeded expenses and use credit cards properly to avoid crossing the credit utilization ratio.
- Reduce all debt- While preparing debt management plans, debtors can plan different sections for debt repayment, savings, and other expenses in the budget plan. Having a well-organized roadmap to debt repayment will help you progress consistently. You can pay off all outstanding balances from your existing unsecured debt.
- Set financial goals- People have different financial goals. For example, is your priority to get rid of household debt? Do you want to save money to pay for education fees? Or do you want to buy a new home after paying off your current mortgage debt? Making a budget will help you work towards these goals.
Other Ways to Manage Family Debt
Besides budgeting for debt management plans, debtors can also try other strategies to manage their family debt.
Debt consolidation
You can use the debt consolidation method if you deal with many high-interest debts like unpaid credit card bills from different family members.
You can consolidate all the outstanding debts from different credit cards your family members use into one low-interest debt consolidation loan.
With this strategy, you can either reduce the interest rates or make a simpler repayment schedule.
Develop your financial education.
You and your family should take time to educate yourselves about personal finance with available courses and reading material.
With proper financial literacy, you will know that paying off medical bills, personal loans, etc., on time will allow you to avoid future debt problems.
Savings/Emergency fund.
You can prepare a suitable emergency fund for your family. Aim to save enough for living expenses that will cover you for approximately four to six months.
You can prepare how much of your income to add towards savings for future expenses.
Here, you can adopt different strategies like preparing a retirement savings account, like a 401(k) plan or IRA.
Or, you can open financial accounts like a high-interest savings account, CDs (certificate of deposit), or investment vehicles like stocks.
Debt snowball/avalanche method.
Debt repayment methods like debt avalanche or debt snowball are also helpful in managing family debt by paying off all debts individually.
In the case of the former, you must first tackle your unsecured debt with the highest interest rates.
For example, pay off the former first if you have a credit card debt with a 15% APR and another auto loan with a 10% interest rate.
With the debt snowball method, you must pay off your multiple debts, starting with the smallest one.
So, if your family has a student loan with a 10% interest rate, a consumer loan with a 12% interest rate, a mortgage with a 30% interest rate, and credit card debt with a 14% APR, pay off the student loan first.
Downsize and reduce expenses.
You can also adopt the strategy of downsizing your assets to manage your family debt.
For example, if you live in a 5 BHK home, you can downsize to a 3BHK apartment.
Sell off your depreciating assets and cut down discretionary expenses- you can use the funds saved here to repay your debts.
Start a side hustle.
You can try a secondary job for a side income. Some valuable options are freelance writing, dog-walking services, part-time jobs, or opening an online drop-shipping business.
You can use the extra income from these sources to manage your debt repayment.
Get Professional Advice.
In some cases, household debt can get overwhelming. Consulting with a financial advisor or attorney specializing in debt issues can provide personalized solutions.
Debt settlement.
If the family debt is too much to handle with a revised budget or repayment plan, you can settle your debt with creditors.
Take the help of specialists from a debt settlement company to settle your outstanding debt in exchange for partial repayment. Adopt this strategy as a last resort.
Conclusion
Managing family debt can be challenging, but it’s not insurmountable.
Budgeting is a fundamental tool that empowers you to take control of your finances and make informed financial decisions.
Combined with debt relief solutions like debt consolidation, snowball or avalanche methods, and a focus on financial education, you can work towards becoming debt-free and securing your family’s financial future.
Author Bio:
Attorney Loretta Kilday has over 36 years of litigation and transactional experience, specializing in business, collection, and family law. She frequently writes on various financial and legal matters. She is a graduate of DePaul University with a Juris Doctor degree and a spokesperson for Debt Consolidation Care (DebtCC) online debt relief forum. Please connect with her on LinkedIn for further information.
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Category: Debt
