Money problems - dealing with debt

Money problems can come in all shapes and sizes, but debt can be one of the hardest to deal with. After all, someone whose bank balance is low might consider themselves to be in financial trouble, but someone who owes more money than they have is clearly worse off financially - they`d probably be happy to wipe out whatever savings they have if they could just wipe out their debt too!

In purely mathematical terms, Mr A, with £5 in the bank and no debt, is in a better position than Mr B, who has £2,000 in the bank but £3,000 of credit card debt. Mr B would probably be well advised to use his savings to pay off as much of his debt as possible, since debts tend to grow much more rapidly than savings. Today, it`s easy to find a credit card charging 20% interest, but most people would be pleased if their bank account paid a tenth of that in interest.

There are exceptions to this. Many people, for example, prefer to keep on paying the interest on their debt if it means they can keep the savings they`ve built up as a `safety net` against unexpected costs - if they need to replace their car, for example, or fix the roof.

What is a money problem?

Different people will have different ideas of what makes a money problem. For some, it means having less than a certain amount of savings; for others, it means being in debt.

These days, many people don`t even consider debt a major money problem, as long as they can afford the repayments. But it`s important to realise how much of their `disposable income` their debt repayments are taking up. This is the income which would be theirs to spend or save - if they could just clear their debts.

While some debts need to be repaid at a certain pace, others (such as credit card debts) can be repaid as rapidly as the borrower can afford. Credit cards also tend to charge high interest rates, so credit card debts are, in many ways, the obvious starting-point for someone who`s decided to start overpaying their debts - paying as much as they can towards them, rather than making the minimum monthly payment.

As well as reducing the amount of time they`ll be in debt, the `overpayment` approach will reduce the overall cost of repaying those debts (by reducing the interest they`ll charge). It also means they`re clearing their debt before it has the chance to become unmanageable...

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Tags: money problems, money, debt, debt problems, dealing with debt

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