The Finance Blogger


Debt Management

Debt ManagementDebt management is playing a large part in everyone’s life these days and if they have not made the right decisions, their debt is going to cause huge problems for them in a couple of years.  The act of managing your debt is making sure that you always can pay your debts in terms of meeting your monthly obligations or payments. It means that when interest rates change you have already taken this change into account and have planned for it. Be proactive and do not wait for problems to start. If you wait they are usually going to be much worse than they need to be.

Debt Management – Interest Rates To Rise in the Next Few Years

As we write this post the Federal Bank in the US is suggesting that interest rates will rise soon in the next year or so as the economy improves and worries turn from a bad economy to one of inflation. The Canadians are also saying the same thing about their economy and that they plan to raise interest rates sometime soon. Neither will give an exact date since it really depends on what is happening in the economy.

Most bankers will take steps to control inflation and the single way they can do this is to raise interest rates to make it less attractive to borrow money and this has the impact of decreasing spending. Fewer people are buying products and services so prices stop rising or  perhaps even decline a bit. Consumers also take on less debt at times like these.

But What If You Have a Lot of Debt Now

If you do have a lot of debt now, you could still be ok, if your interest rate on this debt is locked in for a few years. With a mortgage that has another 4 years on its term for example, you need not be concerned about interest rates going up in the next year because yours will stay the same. On the other hand if your mortgage is going to be renewed in the next year or so, then almost certainly your rate is going to increase and your monthly payments will also increase.

If you are managing your debt you have already taken into account that the payments are going up and have a plan to deal with this increase.

Debt Management Solutions

There are several solutions to managing debt in situations where interest rates are rising. We will cover them in the following paragraphs.

Avoid More Debt – the first one is the obvious one. Just avoid taking on more debt. Keep your debt low and avoid loans for the toys we all want, the 2nd car, the boat etc etc. when interest rates do rise you will be less effected than others who have lots of debt.

Salary Increases – either by receiving promotions, salary increases, both spouses working or by taking on second jobs you find the money to pay the extra payments when interest rates rise and your monthly payments also go up. This is approach has a big impact on quality of life if you take second jobs and you cannot be sure of the salary increases. As well what would happen if one of you lost a job?

Make a Special Payment – if you can save some money leading up the interest rate increases and renewal of your mortgage, then use this money to pay down the mortgage and recalculate your monthly payments. The increased interest rate will drive up your payments, while the additional payment on your mortgage will bring it down. If you have done your homework, the new payment will be very close to the old one.

Pay Your Mortgage More Quickly – most mortgages and all personal loans allow for extra payment once a year. The effect of making these special payments is that you are paying more principal with each payment and decreasing the life of the mortgage as well reducing the total of what you owe. At renewal time you can often keep the same payment that you had even though interest rates have gone up.

Assess your situation and Apply Debt management Techniques

Everyone’s situation is different. We have covered a couple of suggestions in the preceding paragraphs. The important step to take is to assess your own situation, analyze the impact of an interest rate increase on you and your family and then evaluate solutions that will allow you to maintain the quality of living that you are currently enjoying. It takes a bit of work but then what doesn’t especially if there is value at the end. Get started on debt management today.

 

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