Some people will say that they have no debts …. but just ask “do you have any installment purchases?” and we discover that this is not an absolute truth!
“… Debt is the way of using future purchasing power in the present, before a sum has been earned.“
Source: Wikipedia
Since we want to enjoy the present (carpe diem), it is natural for us to incur debts. And there is nothing wrong with that, as long as our future is not compromised.
Some debts can even be considered investments, such as financing for college, a house, or a car, when it is used to generate income.
The problem is when debts get out of control and begin to impact our quality of life.
Most people who take on debt intend to pay it off… someday. What happens is that things do not always go according to plan. There is always some unforeseen event along the way: an unplanned expense, an unexpected decrease in income, and so on. We are accustomed to living on the edge and hoping that with the old “Brazilian way of getting things done, everything will work out in the end.” In fact, everything really can work out, but often at the cost of unnecessary sacrifices.
And when it comes to managing debts, there is often no way to avoid these sacrifices.
Here are some tips for better managing this liability.
1. Listing Your Debts
The first step is to understand the size of the problem. To do this, list all your debts in a spreadsheet, including the due date, description, amount owed, installment amount, number of installments remaining, and interest rate.
For example:
|
Day
|
Description
|
Amount Owed
|
Installment Amount
|
Number of Installments
|
Interest Rate
|
|---|---|---|---|---|---|
| 10 | Credit Card | 3.000,00 | 150,00 | 20 | 7,5% |
| 15 | Car Financing | 15.000,00 | 1.000,00 | 15 | 2,74% |
See the total amount of the installments and which debts have the highest interest rates: those are the ones we will start working on.
2. Know Your Income and Expenses
Analyze your income and expenses, excluding debts. See which expenses can be cut to leave as much money as possible at the end of the month. This amount is your ability to pay the debt installments. Consider 80% of this amount as a safety margin, in case you have forgotten another expense or in case of unforeseen events.
3. Evaluate Your Assets
Before going to the bank to talk with your manager about your debts, evaluate your assets. See whether there are any assets you could give up: the family’s second car, the motorcycle that is only used on weekends, the country house that your relatives use more than you do. Find out how much you could get from the sale. Many people feel that getting rid of a hard-earned asset means taking a step backward, but this is one way to get out of the hole quickly. Besides allowing you to pay off a large portion of your debts or, perhaps, all of them, selling a nonessential asset brings relief to your household budget. Not having a second car may reduce your comfort, but it also reduces your expenses. Think about how much you will save by no longer paying for insurance, IPVA, maintenance, etc.
4. Debt Renegotiation
For those over 30, the term “debt renegotiation” is quite familiar. Before reaching a certain level of stability, Brazil went through several economic crises and turned to the IMF several times to renegotiate its debt. The reasons varied widely, but basically Brazil found itself unable to honor its financial commitments to its international creditors.
When talking about debt renegotiation, understand it as an adjustment of amounts and payment terms so that the debtor can pay. The logic is quite simple: the creditor wants to be paid and, when it realizes that the debtor is unlikely to settle its debts as stipulated in the contract, it prefers to negotiate and receive a little less. After all, a bird in the hand…
Therefore, contact your creditors, starting with those that charge the highest interest rates (such as overdrafts and credit cards). Explain your financial situation and your intention to pay the debt, but make it clear that under the current conditions, this will not be possible. Try to achieve two things: a longer installment period for the debt, so that each payment fits within your budget, and a reduction in the interest charged. Show your efforts, present your “Income x Expenses” calculations and your Financial Control, and try to renegotiate your debts so that you can afford to pay them.
5. Create a Personal Financial Plan
After renegotiating the debt, the next step is to control your accounts! For those who are not accustomed to keeping track of their finances, knowing where their money is going is a complicated task. However, this is something that will allow you to identify which expenses are essential and which are unnecessary, as well as start a savings account and begin making your money work for you.
Start by listing everything you spent in the previous month. Begin with the monthly bills, such as electricity, telephone, condominium fees, internet, cable TV, college tuition… then move on to the larger expenses, such as fuel and groceries, and then list the smaller expenses. The more expenses you can record, the better. See the example below:
|
Day
|
Description
|
Amount
|
Total
|
|---|---|---|---|
| 05 | Condominium Fees | R$ 320,00 | R$ 320,00 |
| 07 | Cell Phone | R$ 51,00 | R$ 371,00 |
| 10 | College | R$ 400,00 | R$ 771,00 |
| 13 | Electricity | R$ 89,00 | R$ 860,00 |
| 28 | Credit Card | R$ 1.200,00 | R$ 2.060,00 |
From there, begin analyzing the expenses that can be cut. Remember, there is no way to eliminate debts without cutting expenses and giving up things we are accustomed to. We are talking about curbing spending, which often means taking a step backward in our consumption habits.
To help you with this task, talk to your family so that they better understand the situation and help you save.
