How to Tackle and Manage Debt While Building Your Financial Plan?

Last Updated: 16 Dec 2024

Debt management plans are a tricky path to walk on. While building wealth is very crucial, it becomes difficult to do it when in debt. Debts could be of various types: loans, mortgages, credit card balances, etc. In this situation, it becomes tough to save finances for unforeseen circumstances or even post-retirement plans.

It might become draining for an individual dealing with debt. With clearing debt, it is also important to save money for the future. This article will show how one can clear their debts while also saving for their plans by strategically planning out finances. Here is how one can look to utilise their debt relief options with a well-thought-out debt management plan:-

Tackling Financial Crisis With A Debt Management Plan

• Clear Minimal Payments First

This is the base step for a debt management plan. Clearing out minimal payment dues in time helps to protect an individual’s credit score. Additionally, if an individual misses a payment date, it could lead to additional interest being levied, which could increase the financial pressure.

• Keep Reserve Cash

Once minimum expenses are dealt with, one can look to keep buffer cash. It is recommended to start by saving a fixed amount that is decided based on daily expenses. This would consistently build debt relief options and avoid situations like delaying payments due to low balances.

• Clear Debts On Credit Card

Any leftover balances on credit cards should be cleared off. It can be done by paying excessive amounts monthly. This helps to avoid high interest rates that are carried. This is an effective way to execute debt management plans.

• Accumulate Emergency Savings

It is recommended to save expenses of up to 6 months in cash for immediate access in case of an emergency. This amount acts as a safety net in case of unforeseen circumstances like a job crisis, medical emergency, or any other incident.

• Other Saving Goals

After securing positions of savings and debt, protect finances by investing or saving them for future purposes. This could be for personal/family goals or clearing off other debts.

Managing Debt Relief Options

Financial goals can take a strong hit with debt. Savings drain quickly, and all profits made by investments vanish in no time. This makes it a mountain task to repay debts like student loans.

However, all debts are not the same. They are differentiated into high and low-interest credits. A debt with huge interest amounts is bound to consume investment profits made. If not kept in check, it would utilise financial resources quickly.

A debt with low interest can be kept low in priority. It can be dealt with later after achieving financial goals and stability. As discussed above, investing while in debt is possible with a debt management plan based on monetary goals.

Here is how one can look to strike a balance between debt and investment:-

1)Keep A Tab On Expenditure

An individual’s finances are limited to paying back debt, investing and dealing with expenses. To begin with, one should account for their spending and where the money goes. Make a plan for expenses and savings after paying for rent, utilities and fixed expenses. A decided monthly amount should be fixed for expenses and savings. Keeping stock funds is recommended to help cover three to five weeks’ expenses as a stable debt management plan.

2)Make Small Deposits

Debts are stuck with penalty fees that cannot be avoided. The minimum debt should be seen as a fixed cost. This amount should be treated on an urgent basis after cutting down on living costs.

3)Invest In Retirement Plan

Some employers provide a tax-advantaged retirement plan also known as 401(k). It provides benefits in tax and ensures investment growth quickly. It boosts financial goals and is a reliable investment to make as a debt management plan.

4)Tackle High-Interest Debts

A high-interest debt grows very quickly over savings. If not accounted for, the debt can reach very high costs that could be kept in check and invested, used to repay debts or even saved.

5)Construct Emergency Funds

An unforeseen mishap can lead to unplanned expenses that can drain savings and push an individual into debt. Building emergency funds as a debt relief option helps to make a cushion for an individual in case of crisis.

6)Make Long Term Investments

With all debts paid up, it is recommended to invest in long-term goals. A diverse portfolio can help to cover low-interest debts and make working on financial goals easier by giving small payments.

Another option available is automated deposits, Investments are fixed, and emergency funds would provide breathing space. Following this would build funds for the future which could be used in paying off bills or saving for retirement.

Clearing debts and making future investments is mandatory. Managing debt and achieving financial goals can be started by keeping financial accounts in sync. It keeps all expenses in one place as an emergency fund under a debt management plan.

Conclusion

In conclusion, navigating debt management is indeed challenging but essential for financial stability and future security. While debts such as loans, mortgages, and credit card balances can impose significant pressure, strategically planning your finances can alleviate this burden. By prioritizing minimal payments, maintaining reserve cash, and clearing high-interest credit card debts, individuals can protect their credit scores and reduce financial stress. Accumulating emergency savings and setting long-term investment goals further ensure a safety net for unforeseen circumstances.

Implementing a well-thought-out debt management plan that includes tracking expenditures, making small deposits, and investing in tax-advantaged retirement plans can help balance the demands of debt repayment with the need for future financial growth. Tackling high-interest debts promptly prevents them from eroding potential savings, while constructing emergency funds provides a cushion against unexpected crises.

Ultimately, maintaining a synchronized financial account, focusing on clearing debts, and consistently investing in future goals ensures not only debt relief but also long-term financial stability. By adhering to these strategies, individuals can achieve their financial objectives and secure a prosperous, debt-free future.