Learn to Manage Personal Debt

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Paying bills

William Shakespeare is called upon for many educated quotes, but only one deals with personal finance. In Act 1, Scene 3 of Hamlet, Polonius bids farewell to his son Laertes, saying: 

Neither a borrower nor a lender be, for loan oft loses both itself and friend.

Chances are Polonius never tried to buy a house or, this being the 17th century, certainly not a car, a luxury vacation, an advanced education for Laertes, or any of many modern-day conveniences. Polonius certainly offers sound advice, but advice that’s not practical in today’s world.

These days, everyone who can do so finds themselves borrowing for any of the above instances and more. The one thing too many of those borrowers, especially younger ones, learn too late is how to manage their debt.

According to bankrate.com, in 2022 most Americans carried at least one credit card around with them with an average card balance of $5,589. In fact, the average American’s debt is $96,371. That’s a lot of unsecured debt on which to pay interest. By the end of 2022, the Federal Reserve Bank of New York reported that American credit card debt alone totaled $986 billion. Given the economy, that amount likely won’t be declining anytime soon.

So how do you manage debt? Good financial planning and strict budgeting are the cornerstones of debt management. Your goal, ultimately, should be to retire any and all debt so you can lead a more comfortable and secure life. The less you owe, the more money you have to spend. The more you owe, the less money you have to spend, since a good portion of what you do have will be dedicated to servicing pre-existing debt.

Discipline Pays Off

How do you manage the debt you carry? Most people follow the do-it-yourself method, dedicating a portion of their income to paying down debt. You have be disciplined, but the discipline pays off by earning you a better credit score which, in turn, can result in lower interest rates when you borrow for big-ticket purchases like a home mortgage.

Some people use credit counselors, who are paid to help those struggling with debt better manage their repayment processes. You will be sharing your financial woes with a stranger, but one trained to help people like you achieve their debt-free goals. They will set a timeline, help you estimate a payment schedule, and offer you a plan to take you to your goal. 

However, some debt management plans require payment to the agency, which is then distributed to various creditors according to the plan they establish for you. This methodology can and does work, but you are contractually obligated to follow the plan, which means less access to your own money. 

Before you go that far, here are some techniques you can try for yourself:

• Pay more than the minimum amount owed. You will retire debt sooner while exponentially improving your credit score.
• Try a “Debt Snowball,” in which you pay off your smallest debt first, consigning the funds you had paid to that creditor to paying more on the next smallest debt. As this process “snowballs” you end up paying more to each creditor up the line until most if not all of your debt is retired.
• Refinance existing debt at a lower interest. A debt consolidation loan may be your best bet here, reducing the number of payments while ultimately costing you less in interest.
• Commit your unexpected windfalls to paying off debt. These include tax returns, inheritances and sources of cash not currently in your budget. You may miss a vacation or two, but you will more quickly satisfy your loan.
• Finally, re-examine your household budget to see if there are ways you can realign cash flow to commit more to paying down debt. (Periodically examining your budget is a good idea anyway.)

Whatever method you choose, you will retire debt more quickly and start keeping more of the money that you earn. Polonius would be proud of you.