Reduce your credit card debt

Credit cards are very convenient and have become a everyday part of our lives. Often we lose control of our spending as it is too easy to make a minimum payment and roll over the payment to next month and then the next and then the next. Before you know the debt becomes unmanageable.

Pankaj Jain.29. sales executive, is a happy go lucky chap. He works hard and loves to have fun too. By the middle of the month he starts running low on cash. Cash withdrawal from the credit card and payments on the credit card seem like the best option to him. Of late, he noted that he has been barely able to pay off the minimum balance due and the total amount due has been rising dangerously. Though he has reduced his spending now, each month the interest has been mounting and it was swelling the total amount due. Pankaj need some serious debt management

Steps to manage debt

1. 1.    Change the lifestyle causing debt

In most cases debt mounts up due to excessive spending and lack of checks and balances. Very often these are not even big or asset building expenses. Most often the credit card is whipped out on impulse buys for clothes, accessories or to pay restaurant bills.

1. 2.    Stop using the credit card

Don’t reduce it – just stop. Put the cards in a sealed envelope in the darkest corner of your cupboard. If you have to pay Rs 5000 for a pair of shoes in cash, it will pinch much more than paying by card. It will also help you curb impulse purchase after all you cannot buy more than the cash you are currently carrying.

1. 3.    Take a loan

The overdue interest you pay on credit card debt is between 36% – 40% p.a. 10-15% more than what you would pay on an unsecured personal loan and 20-25% more than a secured loan such as a home top up loan or loan against an LIC policy. Look at all your option and make some calculation. Lastly, do not let your ego come in between taking a temporary loan from close family if offered.  Avoid settling with the bank or defaults since will reflect poorly in your credit report and you may be rejected for a loan when you need one.

1. 4.    Understand where you are overspending

To make change permanent it is essential to understand the problem areas. Take your credit card bills of the last 1 year and try to figure out which are the high spending items there. Is that Rs1800 shirt you purchased a year ago still in use? Would it not be of much better value if you had brought one for Rs500?

1. 5.    Set up a budget

Budgeting does sound boring but wallowing in debt is far worse. So you need to allocate your spending prudently. Till your debt is fully repaid ALL unnecessary expenses have to curbed include the evening coffee at Starbuck.

1. 6.    Be prepared

When the debt is repaid one breathes a sigh of relief and then goes back to the same destructive behaviour. It much like going on a strict diet and then binging. Be prepared for the urge for financial binging. Living within your means is not difficult as long as you have made up your mind to do it.

 Article first appeared in Credividya.com

Teaching your kid money management

Most of us are well aware of the importance of creating budgets and plans for our personal finances. However, sometimes we forget that we also need to pass on this essential knowledge our children about planning and budgeting.

Saving

You have to give your child the power to decide how much to save and how much to spend. By giving your child this power, you will also confer the responsibility and excitement that comes with making adult decisions. You can make suggestions and prepare some example plans, but the final choice should be left to your child.

By giving your child a choice of how much to save, you bypass the question of whether or not to save. The goal of this exercise is to teach your child to make saving a habit. Help him save by starting a bank account and encourage him to save extra by adding a matching amount he saves each time.

Spending
You should not interfere in how your child uses his or her spending money. Don’t interfere with your child’s spending habits other than to point out that once it’s gone it’s gone – you won’t provide more money if your child spends his or her own too quickly. It’s a difficult lesson, but children will do better if they learn it early.

Get Organized
On the same day as you open the account, go shopping with your child and select a binder, a congratulatory present. You will use this to organize your child’s bank statements. Starting out with an organized record-keeping system will be valuable when your child gets older and has to grapple with taxes and accounting.

When the statements arrive, go through them together and explain the interest and any other numbers that may appear upon it.  On the same day as you regularly pay out your child’s allowance, go together to make the deposit at the bank. This will help to reinforce the habit of saving before spending.

So go ahead and give your child habits that will last him a lifetime.