A debt accumulates when you spend beyond your means, and your regular income cannot refill what has been spent, which results to a deficit in your whole money stash. If the payment-more-than-income cycle continues, you’re likely to have accrued debts in just a short span of time.
While one can survive and live the “extravagant life” without savings, one can’t continue having such a lifestyle when there’s a deficit that continuously accumulates and there’s no savings to speak of.
But what really is accrued debt?
Accrued debt, in its most generic form, is the sum of payable debt at a certain period with a marked increase rate from the initial and principal terms of interest payment. It happens when a person pays only the minimum amount due (credit lines, credit cards) or the interest for a pay period (loan). A debt accrues when the interest increases on top of the money owed. It only stops when everything gets paid.
Acquiring debt seems inevitable given the current economic state, particularly for young people who hustle to make ends meet, get an education, and start a productive life for themselves. But, is there really a way to escape from the grip of accrued debts?
Fortunately, there is. However, before applying the solutions to eliminate accumulating debt, it’s crucial that a debt-ridden person has the determination and willpower to do it. The process requires drastic changes in personal and lifestyle aspects and even family sacrifices. Now, take your cue from the following methods.
Evaluate your finances
If you want to go debt-free or at least minimize your debts, you must list down all of your existing debts, including monthly bills and debit card credits. This list should also include the APR (Annual Percentage Rate) or the charged cost to borrow money as well as the balance for every credit card you have.
Evaluating the APR of each card will help you plan and strategize on how to reduce your debts. If you want to save on interest charges, you might want to pay those debts with high interests first. Or, you can start by paying off lower-balance cards if you want to give yourself a psychological edge.
Evaluating the APR of each of your cards will help you plan and strategize on how to reduce your debts.
The next thing to do is to create a comparison with your income with your expenses and debts. In doing so, you must consider other factors such as credit card balances, loan debt, mortgage debt or rent, and grocery bills. Regarding your income, take into account the interest earned on your savings, your salary, and your other sources of income.
Live and spend within your means
The golden rule of budgeting wisely: live and spend only within your means! These should be pretty practical and straightforward: spend more time at home, cook your own meals, walk or ride the bus, and switch to cheaper utility providers. If you must spend for people, occasions, and special things, do it responsibly and not for pretentious reasons.
Many people who have been debt-ridden once but managed to shift to a practical lifestyle have found wisdom and joy of living on less which results to new financial freedom, more secure future, and more savings compared to living the high life.
Minimize your accrued debt
Simply put, you must pay your debt, no matter how big or small it is, from whom it was loaned, and how long it will take. Here are the ways on how you can do it.
- Low-interest debts. You have to focus on paying the principal amount as early and as much as you can. It will make the payment easier, and the interest becomes lower. It’s possible to have terms that may require a fee if you settle your debt shorter than what’s stated in the contract or agreement.
- High-interest debts. Debt consolidation is the best option for paying and managing debts with various ranges of interest rates. Debt consolidation usually means rolling all your high-interest debts into one loan with single interest.
This fee is often smaller than what you have to pay should you wish to maximize the loan maturity’s length. You still go for faster eradication of debts and lesser total payment.
Taking control of your financial obligations starts with a realistic evaluation of how much money you spend and how much you take in.
There are payment options that you can resort to in case a bank loan is out of options:
- No-interest debts. Just because it’s a personal loan with no interest doesn’t mean you can put it at the backseat of your payment obligations. Don’t take comfort with the fact that your friends or family will understand and patiently wait for your payments.
There might be no interest at stake, but it’s the trust and relationship that you step over to borrow money that can be compromised. You must create a payment plan and stick to it.
Make budgeting a habit
Taking control of your financial obligations starts with doing a realistic evaluation of how much money you spend and how much money you take in.
List down all of your income sources as well as your fixed expenses such as:
- personal care
The next thing to do is make an inventory of your payables, then compute the actual amount needed for these expenditures. Budgeting will help guide in deciding about what strategy to use to shave off your debts.
The goal of getting back to the basics of budgeting is to review the important thing one has missed which results in accrued debt such as:
- spending beyond your means
- buying unnecessary things
- careless use of money tied to debt accumulation
When you finally have the calculation for the necessary payables, stick to it, and limit outflows.
Improve your financial habits
If you don’t take the initiative to change the behavior that got you into accrued debt in the first place, you’ll wind up into debt again. As such, it’s important that you know how to differentiate between needs and wants. Do you need to set up an emergency fund and pay your bills? Definitely. Do you need housing and food? Absolutely. These needs should always come first before wants. It’s also equally important to stick with the budget you made. If you can’t keep track of your spending and income, the same debt issues will occur.
What’s in it for small business owners?
Many small business owners are burdened with the weight of accrued debt. As the prices of goods and services rise, lenders are forced to tighten the reins to the borrowers too. It’s evident to the data given by Jessie Hagen of U.S Bank who concluded that 82% of business fail because of poor understanding of how cash flow works. Incompetence in comprehending and managing cash flow can lead to poor business and personal credit scores.
How a personal credit score may affect your business
Lenders of small businesses check both business and credit histories, which basically means personal credit can affect their chances of getting approved loans. It’s a must for lenders to do it because many small businesses haven’t established their business credits yet.
Separating your business and personal credit protects one from the other in case unexpected downturns in business or personal aspects occur like accrued debts.
However, no matter your excellent business credit, if you operate as a general partnership or a sole proprietorship, lenders will always consider your personal credit score, debt-to-credit ratio, overall financial statements, and size of loan request when evaluating a business loan application.
In most cases, lenders also use your personal credit score to decide what types of loans will suit you, along with the terms and interest rates associated with those loans. The snag of such system is that you, as the business owner is the one who’s going to repay the loan and not your business. Also, businesses have better chances to get more funding compared to personal borrowers.
That being said, separating your business and personal credit protects one from the other in case unexpected downturns in business or personal aspects occur like accrued debts. Here are things that small business owners should do:
- Get business credit cards from companies that are directly affiliated to credit reporting agencies.
- Open a line of credit with at least five suppliers or vendors.
- Form an LLC or incorporate your business.
- Get an EIN or Federal Tax Identification Number.
- Open a bank account for your business.
- Acquire a credit file for your business.
- Register a phone number for your business.
- Settle your bills on time, always.
Moreover, it’s also crucial to review what factors do business credit agencies consider when computing your credit score so you can create a feasible system in managing your finances and avoid accrued debts.
Takeaway on avoiding accrued debt
Getting out of debt doesn’t happen overnight. It may take you a while to eliminate it. Although debt is a constant factor of being an active consumer, it’s neither advisable nor necessary to avoid it. You can avoid becoming a victim and restrict the possibility of your debt taking control of your life as long as your conscious with benefits, risks, and consequences of all your financial transactions.