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Neeraj Chauhan is a Certified Financial Planner and CEO of The Financial Mall. The Financial Mall is a financial supermarket & in operation for over 20 years. It manages total financial affairs of clients through wealth management and financial planning Process.

Thursday, August 25, 2011

Staying Out of Debt Trap

Sound debt management is a practice that is always “in style,” whether economic times are good or bad. Effectively managing your debt prepares you to weather tough economic times, as well as to capitalize on a healthier economy. Here are some tips to help you get out, and stay out, of debt

·        Cancel all credit cards except one, and pay the balance off monthly. If you don’t have them, you can’t use them. By limiting yourself to one credit card, you prevent yourself from maxing out several cards.

·        Use a debit card instead of a credit card. A debit card offers all the convenience of a credit card, without adding to your indebtedness. The cost of a purchase is immediately deducted from your bank account. Since you can’t buy something unless you have the funds to cover it, using a debit card can help you live within your means.

·        Avoid using credit for items that depreciate or have no income-producing potential. Buying on credit for items such as clothing, dining out, groceries and vacations may cost you more in the long run. These goods don’t grow in value, and may end up costing you even more if you don’t pay off your account each month and finance charges are added to the balance.

·        Limit monthly installment payments to 10 percent of income. Credit may derail your budget if it exceeds amounts that you can repay. A good, general rule of thumb is to limit payments on monthly installment debt (excluding a home loan) to 10 percent of income.

·        Comparison-shop for the lowest interest rate. Even a small difference in interest rates can make a big difference in the total interest you will pay over time.

·        Set aside a cash reserve. A cash reserve can actually help you pay down your debts. Each time an emergency arises you won’t need to borrow additional funds ¾ you can use your savings to handle the crisis.

·        Be cautious about using your savings to pay off debts. Although it sounds reasonable to use low-interest savings to pay off high-interest debt, delaying a savings program will cause you to lose the benefit of months or years of compound interest. A better approach may be to continue to pay down your debt in regular monthly installments, take on no new debt, and retain your current savings.

·        Beware of debt consolidation loans. You can’t borrow your way out of debt. Debt consolidation loans reduce your total monthly payment by spreading your debt over a longer term, but you will end up paying more interest in the long run.

·        Use credit wisely. Not all credit is bad. Wise uses of credit are those that help you prepare for the future by purchasing assets that appreciate, or by contributing to savings vehicles that produce an economic gain or a return that exceeds the interest rate on the credit.

One of the chief causes of financial failure is credit abuse. Easy, accessible credit may tempt many people to “buy now and pay later.” Credit card purchases that offer instant gratification with “no money down” will sink any ship if you lose track of spending. Reining in excessive spending habits may be difficult, but a little fiscal discipline can help you clear your decks of debt and prepare for smooth sailing into a sound financial future.

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