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Avoiding Bad Debt

Who said debt was bad in the first place? Just think of the things Australians would not be able to do without borrowing money and thus, getting into debt. They would not be able to buy a house, a car or in many cases even pay for their college and university education. Debt by itself is not bad, in fact it is a necessity, and its handling the repayments carelessly that makes the debt go bad. Avoiding bad debt is all about managing finances well and one can do this only by following a strict budget.

The art of budgeting

Money management is all about budgeting. Budgeting is nothing but planning your expenses and saving prudently. A good money management system will include taking stock of the total income, either monthly or annually, then taking stock of the expenses both monthly and annually.

Income

All expenses must be calculated as monthly expenses. All income must be calculated annually. Taking every source of income into consideration is important. So, when calculating your income do not forget to calculate even the smallest of amounts such as those from gifts and dividends or interest from a bank. This amount must be divided by 12 to get a monthly amount.

Expenses

Then you have to consider you expenses. Take into account fixed monthly expenses such as mortgage payments, loans, card bills, utility bills, fuel, vehicle repair expenses, cell phone and internet expenses and everything that you have to clear on a monthly basis. Then account for annual expenses, those that come once a year such as investments, insurance, birthdays, festive gifts, household repair, vacations and school or college fees and budget for them. Divide this annual amount by twelve and add it to the monthly expense budget. You will have a fairly clear idea of how much you have to earn in order to meet your monthly expenses.

Savings

Subtracting your expenses from your income should leave you with some cash to put away for a rainy day. This is your liquidity and should not be confused with your long-term investments such as mutual funds and insurance etc.

Watching out for debt traps

As long as you are saving some money each month you are safe. But when you find that you are in need of a personal loan – or even loans for business or any form of start up business loan – you are heading for trouble. It is time for you to sit back and review your situation. Are you skipping your card payments? Are you constantly looking out for opportunities to borrow money to pay a debt? If the answer is yes, you should consider cutting back on some expenses and catching up with your mortgage and card payments. You have two options, first, you can cut back on expenses and second, you can look for alternative sources of income to supplement your excising income – or you can do both. But keep a keen eye out for expenses and earnings. As soon as the balance is disturbed you need to take remedial action in order to avoid bad debt from taking a strangle hold of you.