Debt is often an alternative if you need unexpected funds. Therefore, managing debt is very important to maintain your financial stability.
Of course, it takes a way to manage debt wisely so that the debt is paid off before the due date. How to manage debt so that your finances remain stable? Check out the methods recommended by the Euvataction Finance Team!
1. How to Manage Debt Wisely
1.1 Create a Detailed Debt List
The first way to manage debt is to make a list of your debts. This is done so that you can see transparently the remaining debts and can create a budget that includes your debts. Starting from car installments, motorbikes, and other installments, write down as much detail as possible the debts that are running.
1.2 Prepare a Budget
Next, you can create a budget with discipline and realism. Make sure you allocate income to pay off debt and stay disciplined from the budget you have created. Don’t forget to include your debt list in your monthly budget.
1.3 Set Debt Priorities
One effective way to manage debt is to set payment priorities. According to the Financial Services Authority, if you have more than one debt, there are several methods that can be used to determine which debt should be paid off first. Here are two approaches you can apply:
- Prioritize debts with smaller amounts. If you have several debts, such as a debt for a cellphone worth Rp7 million and a motorcycle debt worth Rp15 million, you can prioritize paying off the debt with the smaller amount first. This approach can give you a sense of accomplishment because you have succeeded in paying off debts faster. So, in this example, you can pay off the cellphone debt before starting to pay off the motorcycle installments.
- Prioritize debts with higher interest rates. Another approach that can be taken is to prioritize debt payments that have higher interest rates. For example, if a cellphone installment has an interest of 3% while a motorcycle installment is only 1.5%, then the cellphone debt should be prioritized because the interest is higher. This helps you reduce the burden of interest that continues to grow over time.
Both methods have their advantages, depending on your financial situation and the strategy you find best suits your payment capabilities.
1.4 Pay More
If possible, make payments more than the minimum amount that has been set. Minimum payments are usually applied to credit card installments. Although credit card installments have flexibility in minimum payments from your total debt, many financial experts do not recommend making minimum payments. Because this habit can make the debt repayment period longer and trigger financial transactions outside the plan to cause consumptive habits. By paying more or in full, you will reduce your debt faster and reduce the burden of interest that continues to accumulate.
1.5 Debt Consolidation
The next way to manage debt is to consolidate debt if possible. If you have more than 1 debt with different interest rates, you can consolidate or combine your debts into one loan with a lower interest rate. This makes debt management simpler because you only need to make one monthly payment. You can communicate well regarding this debt consolidation to the lender.
1.6 Debt Restructuring Negotiations
If you find it difficult to pay your debts, then the next way to manage your debts is to negotiate to restructure your debts. For example, during the Covid pandemic, many banks or other financial institutions provided debt restructuring relief, due to the unstable financial condition of the debtor . Usually, in this scheme, the creditor will offer adjustments such as extending the term, lowering interest rates, and arranging payment plans according to your situation and conditions. This will also provide space to manage finances better.
1.7 Reduce Less Important Expenses
You should focus on reducing your expenses . This is so that you are not tempted to take on debt elsewhere. Reduce less important expenses, such as eating out and buying things under the guise of self-rewards . Look for cheaper alternatives so that you can manage your debt.
1.8 Avoid Adding New Debt
The next way to manage debt is to avoid new debt. Make sure your debts are paid off. Avoid digging a hole, covering a hole so that you don’t get caught in a cycle of debt. It would be better if you finish all the debts you have until they are paid off. Also minimize debt for essential needs.
1.9 Leverage Assets
The last way you can do to manage debt is by utilizing the assets you have. Assets, whether in the form of property, vehicles, or other valuables, can be a solution to help pay off your debt. Selling assets is a step that can be taken if your financial situation is increasingly urgent, and you have difficulty paying off debts regularly.
BFI friends, here’s what you need to know about how to manage debt effectively and wisely. Come on, pay off your debt before it’s due, manage your finances well and start preparing an emergency fund .