What is a debt management plan, is it the same as a debt reduction plan what is the difference between these plans. Should a debt management plan be something in place before borrowing money.
https://www.bankrate.com/personal-finance/debt/what-is-debt-management/ By Raychelle Heath
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Hello, I'm your host, Mr. Chuck, a retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence, determination debt management plan? What is a debt management plan? Is it the same as a debt reduction plan? And what is the difference between these plans? Should a debt management plan be something in place before borrowing money? That's what I think. I've been talking about a debt reduction plan I go line by line and how to do it. And that's for people who are already got themselves too much credit card debt. Or maybe they got normal debt from your house, automobiles, maybe a couple of credit cards, maybe a personal loan, a personal loan and student loans. And they're just interested in getting paid down faster. So that's basically what my debt reduction plan is going to do for you. What is a debt management plan? It's the same thing. It's for people who are already have too much debt and are struggling to pay it off. But a debt management plan, how does it work? Well, it's a system that allows you to pay one monthly payment that covers all your included debt. Essentially, once your creditors are agree to the plan, you make a single payment each month to the facilitator of your debt management plan. It's not alone, however. And your monthly payment is divided in diversity to your creditors every month. So this is something that you would go to a credit counselor, whether it's a for profit or nonprofit, credit counselor, and they will work with you for a fee to help you reduce your debt. I'm not a big fan of that he got in debt by yourself, you should be able to get out of debt by yourself. Is there a cost? Yes, whenever you're using a professional service, because a debt counselor is a professional or service, there's gonna be a fee. And you're gonna be paying more to get out of debt. That's why I believe in do it yourself. That's why I promote my debt reduction plan. It does everything except for negotiating lower rates with your creditors, he can do that on your own. I don't know anybody has done it and been very successful. That is something you can try. But you got to get your life under control. First, you got to figure out what's causing you to accumulate this debt, then you got to fix that problem, which is step number one quit creating a new debt, then you got to make the minimum payment on all your debt, you got to set up a emergency fund, and build it up so that if something bad would happen, you would have the money available to pay for most of it. Maybe not all of it at the beginning, but most of it and that's going to help you with step number one quit creating new debt. And then once you get that minimum amount in your emergency fund, and you keep building up your savings account, which we're calling emergency fund savings account once and the same thing. He keep building it up to you have one two or $3,000 more than what you need for your emergency fund. And then you apply that using any method you want to a debt to pay it down quicker. And you keep doing that over and over and over until you get something paid off and then you go on to the next one. There's two methods on how to apply your payments snowball method, which is you pay off the lowest balance first, or the Avalanche method which you pay off the highest rate of interest first. I've always said in the past that you pay the first one when Diskin started, you pay off your lowest balance first. You do not close the account. You leave it open. We're talking credit cards here. You leave it open because sometime down the future they're gonna make you an offer to for a balance transfer. For, and you're gonna get a 12 month or 18 month or some time period of interest free on that debt. So that that will save you money over time, then once you get that first one paid off, then you start applying it to the highest rate of interest. After that, and you keep doing it over and over again, that's my debt reduction plan. In a nutshell, a debt management plan is going to do something similar, except somebody is going to do it for you, you're going to make one payment to somebody, they're gonna charge you a fee, they're most likely gonna take their fees first, and then apply it to whatever debt you have. So it's gonna take you longer to pay down your debt, because you're paying that fee, whether it's a monthly fee, or setup fee, whatever it is, it's gonna take you longer to pay down your debt, because you're paying somebody to do it for you. And there are companies out there that will say, quit making your credit card payments, pay us first, and what's gonna happen, you're gonna get a bad credit rating, they're gonna try to foreclose on you, maybe they haven't contacted all your credit card companies yet. And they don't know about it. And because they're more interested, they're not going to do anything until they get their money. First, I'd like to keep that in mind. That's about way everybody works. If you need to have a credit counselor, or a debt counselor, that's generally what's required for you to do before you can file bankruptcy. So that's one of the steps getting towards filing for bankruptcy. Now, I'm more talking personal bankruptcy here, not for business or anything like that. I don't like them. And you got yourself in debt, all by yourself, you can get yourself out of debt. So that's my premise to that. I have two articles in my show notes, one from bankrate.com. What is debt management plan? And the other one is money. management.org. What is a debt reduction plan? And they're basically talking about the same thing. You're already in debt, you're having trouble paying your bills, and you think you need help. You can educate yourself. That's step number one, the a do it yourself debt management is one of things in the article. Or you can use a credit counselor. And is it right for you? Maybe it is maybe it's not, maybe you need help, because you don't have He can't stay online and do everything you need to do. But what I would like to talk about is a debt management plan. That's something that you do before you borrow money. So what am I talking about? Well, you're if you're going to borrow money, whether it's buying your first home, or buying a new automobile, after you have your first home, whatever it may be, he should have a budget setup. He should know how much income is coming in every month, what your monthly expenses are gonna be, what your entertainment expenses are, what what your living expenses, he got housing, you got transportation, you got entertainment, you got food, and clothing may be daycare dependent, you know, everybody's going to be different because everybody's in a different phase of their life. But you need to have a fairly good grasp on how much money's coming in how much money is already going out on the monthly basis, then he also should have a fairly good understanding of just because you're putting $200 a month and the savings account. How long does it stay in there, if you put it in there, and then you have to take it out to pay something three weeks later, or a month later. You really not putting $200 a month in a savings account. If you can put $200 a month in a savings account and it stays there and you never ever have to pull it out and your savings account is growing over time. That's a good thing. But don't look at that as well. I can buy a second car from my wife and I can afford a $200 monthly payment on that. Car? Because maybe you can't, because not only do you have the $200 a month monthly payment, you're gonna have additional cost for auto insurance, you're gonna have additional cost for fuel and maintenance on that automobile. So it's clearly gonna cost you more than that. And can you handle it? What can you cut out of your budget to cover those additional costs? Or are you going to be stuck struggling again, and maybe using a credit card thinking, Well, I can pay that off in 30 days, or 60 days. And then you get a little bit behind. And before you know it, your credit card debt is powered up, you're behind, you're struggling to make all your payments, and you don't know what to do. So you're back to the, oh, do I need a counselor to help me? Or can I do it myself. I'm an opponent for educating you educate if you get a good understanding of your finances, and you have a monthly budget, and you go through that monthly budget with a fine tooth tooth comb, and you can cut out things that you really are not using anymore, get rid of them. And ask yourself before you spend money, do you really need that item? Can I get along without it? Would I be better off saving that 40 bucks, and putting it in the savings account for future use? Or do I actually need this item, for whatever reason, and you got to justify that to yourself. That's called Getting your spending under control. If you have a lot of debt, if you're having problems paying your bills, that generally means your spending is out of control for the amount of income that you have coming in. What are your monthly fixed expenses that you pay every month? Are you paying a monthly rent, monthly mortgage? Do you have a line of credit on your home, also plus your mortgage, she had one car payment Do you have two car payments? Do you have two children that are in daycare that cost you quite expensive every week are you better off maybe not going to work and taking your children out of daycare and raising them at home yourself or your spouse. Those are the type of decision she got to make. So that you can stay out of debt. So you can keep your life on track for what you want to really do. And the main thing is once you have your debt under control, if you're planning before you borrow, and you know, it's something you're not gonna have any trouble with, and you don't have to reduce your lifestyle and things you're already doing, then you can borrow the money, you should be safe to know that you won't be struggling to make those payments. To me, that's debt management. A debt management plan as planning before you borrow the money. But if you go to the internet and look up that management plan is basically a plan to help you get your debt under control. To me that is backwards. You should be planning before borrowing. Know what you can afford. Don't let a salesman sell you up. Know the product like free if you're gonna buy a car, know the make and model know everything about what you want in that car. Know what the competitors are willing to sell afford. Be prepared and know the your cost of the borrowing. how much they're gonna cost you to borrow that money. How many years are you gonna be making a monthly payment? What's gonna happen if you lose your job? What would happen if your spouse loses their job? What are you going to do if you have another child? There's a lot of things to consider. But that's called life. And getting through life is easy. If you have a plan, and you have it under control. So in the perfect world, you would start out with your first job. You set up a budget Here's my income, and what's my expenses? Well, I got a car and I got to travel to work. That's it. I have a car payment, $100 a month, I have gasoline $100 a month. These are just numbers. I mean, I'm just making enough, there's not actual. So you know, you're making $1,000 a month, and you're got $200 A month in expenses. So you have $800 of the $800, some of that should go into a savings account, and some of it go for entertainment. Then as you age up, and more life gets more complicated, whether you buy a home, whether you're planning for a wedding, whether you're planning for a new car, then you can say money in advance for these items, so that you can use less debt. So you don't have to borrow a bunch of money to do what your garment and come across throughout your life, buying a car, whether it's getting married, whether it's having children, you can plan ahead and be ready for it. I'll be back in one moment with my final thoughts. For those of you who listened to this on an app, please find rate and review. I really appreciate it. If you know anybody that might benefit from listening, please let them know about reduced debt increase? Well. When I come back, I'm going to talk about personal finances, and everything involved with personal finance. Before I talk about my final thoughts, what is personal finance, I'm going to do an overview of personal finance. Personal Finance is a term that covers manage your money as well as saving and investing. And then compasses, budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. So it's everything in your life that involves money. Think of it like that. Anything that involves money is your personal finance. It also includes goals, financial goals, where do you want to be five years from now short term? Or do you want to be with your finances 15 years from now, mid term and long term, whether it's saving for your retirement, your children's college education. And again, as I said before, for any expenses that may come up in life, whether it's saving down payments for a home, for automobile, or for a wedding, or with having children, knowing your income. And expenses on a monthly basis is the just the most important part of personal finances. How you gonna meet any goal. If you don't know how much money you have coming in, and how much money you got going out, say that most people know how much money's coming in. What they don't know is what's their monthly living expenses? What's the minimum amount you need to pay your bills for housing, transportation, food, entertainment, I'll just keep it simple. Keep it down that basic categories. If you know how much it's costing you on a month to month basis, and you know that you have the income to cover it. And you know that every month, you're gonna put $500 in the savings account like clockwork, no problem. You're doing good. But when you go to borrow money, how much should you be borrowing for a certain topic or category? And example that would be housing. How much of your gross income should your mortgage be? I would say the lower the better. It's going to be somewhere between 25 to 35%. Of Your gross income, gross income, meaning the total amount you make, before taxes before your retirement plan, and before any health insurance is deducted. As I said in the past, that should not exceed 43% of your gross income. If it exceeds 43%, you're gonna have difficulty and making those payments and making paying for things you need to live on, you're also going to have even more problems trying to borrow money. If that's the case, transportation, the loan, the money you borrow for your automobile expense, should not exceed 15%. That's pretty much the basic. So if you know these percent of your income, and you know how much your budget is, and you know where you're falling into, you got a grasp on your personal finances, if you can keep your percentages under control in the rains, that's recommended, you're not going to have any trouble and paying all your bills, or rigging problems is we get two or three credit cards, we tend to spend too much for whatever reason, maybe you lost a job, and you had to use a credit card to pay for your daily living expenses. Why? Because you didn't have an emergency fund. That's part of personal finances. Not only are you planning for your monthly expenses, you should be planning for future expenses, expenses. And saving money, putting money aside, in case something bad happened to your life, whether you get laid off work, lose your job, or get sick and unable to work. Or whatever the case may be. You'll have some money to fall back on. So you're not living on credit. That's the last thing you want to do. You want to make sure you're taking care of everything. So you do not have to live on credit. So personal finances is everything in your life and tax tax planning. What is that? Well, an example would be you have a home and you're thinking about upgrading to more efficient windows and doors. Is there a tax credit you can take and get a little bit of your taxes back? Maybe there is maybe there's not but checking first before you spend the money? Knowing that there's a tax benefit of some type. Maybe it's a beneficial to you maybe a won't be the Elyse do you know about it? That's the most important thing. That's called tax planning. So when you have somebody do your tax return, you should ask them, I'm planning on upgrading my windows in my home, is there anything in the tax code that allows me to get a benefit from spending that money their money to spend? And maybe there is maybe there's not there used to be? I'm not sure if there still is today. And understanding the basis of your taxes is important. Knowing that your mortgage interest is deductible knowing that your real estate taxes are deductible, knowing your state and local income taxes are deductible, knowing that your charitable contributions could be deductible to a certain amount, knowing how much of your medical expenses that could be deductible, just knowing the basics is going to help you understand more about your income taxes. And you also be better in keeping receipts. Because if you know it's gonna be something you can deduct on your tax return, you're going to keep the receipts. So that's important. Estate planning estate is when you pass away, what you leave behind and planning on who gets what is important. Also, if depending on the income that you have in the value of your state, there could be some estate taxes involved. So knowing the limits is important. And then working with a professional to help you work around to minimize the taxes that you have to pay. So that the more Money can be passed on to your heirs to your children, or grandchildren. That's all personal finances. And as I talked earlier, plan ahead, before you borrow money, that's the most important thing. Do you really need that item? Can you afford that item for the amount of time it's going to take you to pay off that loan? And what would you do if you lost your job or your spouse lost a job and your income goes down? Would you have a big enough down payment, so you could sell that item without having a loan still do once you pay. So in other words, don't be upside down in your loan owe less than the value of it. So if you have a car, you don't want to be owing more than what the car is worth. Because it's the hard to get rid of in that case. And if you take it to a dealer, and they just roll that over into another car, you're just making the problem worse, you just delay in the problem. So that's all I have to say. Knowing on an understanding what debt management is, before you go in debt is important to plan ahead. Don't do it. If you know he cannot afford it. Look for something else and turned it there's always an alternative to everything you do in life. So find a cheaper alternative that you can live with for now, and you'll be glad you did. So