Perhaps one of the biggest obstacles to financial health is having debt that suffocates your income each month, which can become a perpetual burden if not handled correctly.

Approach your debt problem like an engineer, dissecting each portion and coming up with a logical plan to conquer it.

Here are some quick, practical tips and tricks to help you better manage your debt.

Please also check out Engineer Your Finances: How to Save More Money

 

General Disclaimer:

This information is for educational use only. The Engineer Mindset does not guarantee any results or financial returns based on the advice below. There is also no guarantee that this information applies to your specific situation now or at any later time. I recommend fully consulting with a qualified financial advisor for all your financial decisions.

 

Tips for Managing Debt

Debt is like gaining weight: super easy to acquire and very difficult to remove.

If your debts are more than 40-50% of your income, then you’re in bad shape.

You’ll need a good plan for prioritizing and paying down debt, as well as an overall financial strategy to lead you toward filling your cup instead of taking away from it.

Managing debt, however, starts really before it is even accumulated by being smart about your spending.

Debt Avoidance – Smart Spending

In the modern age, everyone around you wants to push you toward online frictionless spending.

One click subscriptions, Apple Pay, and touchless credit cards all make it effortless to spend our hard earned money.

To combat these tendencies, try this:

• Put a barrier between you and spending. Don’t sign up for easy, unneeded subscriptions or engage in spending that goes unnoticed.

• Implement a cooling off period when shopping online. Put things in your online cart and let them sit for a few days.  Sometimes the excitement wears off and you end up not wanting/needing the items anymore unless they are really necessary.

• Take inventory of the amount of marketing emails you’re getting. Where are you spending your time online? Are they pushing you to spend? It can be alarming sometimes to see how many emails are frequently pitching things to you.

• Do an email overhaul and unsubscribe to the emails you don’t want to see anymore. This will reduce your temptations and also clean up your inbox at the same time.

Prioritize and Organize Your Debts

Debt avoidance is the best practice, but what should you do about the debt that you currently have?

The first step is to list out your debts and prioritize them with the most toxic and highest interest rates first. Organize by listing minimum monthly payments, and note if some debts can be delayed without penalty.

Credit card debt is usually the worst and most difficult to get out of because of the high interest rates and fees (which we all know is by design.) Plan on attacking that first!

There’s also variable interest rates that are meant to be confusing and can sneak up on you.

Research terms you don’t know and make an effort to understand how you’re being charged.

Don’t be in a rush to pay off things that generally have low interest rates or tax benefits such as student loans or a mortgage. These can possibly be paid off last.

Develop a Debt Payment Plan

Once you have everything listed out, then create a plan of attack.

Implement some logic or a scheme that works for your situation to pay them down one by one, pecking away.

One method is to pay a little each month on each debt, but this can take too long and you’ll never seem to make progress.

Personally, I like Dave Ramsey’s “Debt Snowball” in which you pay off your smallest debts first, then move on to the next biggest one in line, and so on.

This plan builds momentum that is not only emotional, but also frees up more of your money to pay off even more debt.

Before long, you’re attacking the nastiest debt with the biggest snowball.

If you have medical debt, talk to them about a payment plan. As long as you communicate your situation to them, most hospitals and providers are sympathetic and will set up an interest free payment plan for you.

Whatever you decide for your pay down strategies, make sure they fit within your monthly budget.

Allocate Essentials First

Before you seed your Debt Snowball, take essential living expenses out of your paycheck first.

These will be things like your mortgage, rent, utilities, and other things that you’ll need to live on.

If your company does a 401k match, don’t forget to contribute the maximum amount to get their match because it is free money.

Take care of your emergency savings fund second. This way you have a safety net and don’t have to keep digging a deeper hole if you run into trouble.

Once these essentials are pulled out, you’ll hopefully have some available ammunition left over for paying down debt.

 

Overall Financial Planning

Managing debt and learning to save more money are two major concepts of financial health, but the whole point is to have some balance to enjoy life a little bit while still paying off the past and saving for the future.

Most people don’t know how to balance their budget right out of the gate, so you have to work at it and constantly be refining your approach over time.

Find out what works best for you and your specific family situation.

Financial planning might not interest or be best for everyone, so enlisting a qualified financial planner is always a good move.

If you’re more hands-on, a good approach is to look at your budget in terms of percentages to get started.

Nerd wallet likes the 50-30-20 budget: 50% of your after tax income goes to absolute must haves like rent, mortgage, insurance, child care, food, etc. 20% will then go to savings and debt payments: emergency funds, 401k, extra loan and debt payments.

The remaining 30% is for your “wants” or the fun stuff and for enjoying life.

Sometimes your 30% for fun gets squeezed and erased temporarily, but once you’re back on track it’s important to enjoy life too.

 

Conclusion

Taking control and managing debt is the first step in “financial engineering,” since debt can take over your excess capital each month and impair your ability to save more money.

The best way to manage debt is to avoid it altogether if you have the option, by being more aware of your spending habits and putting barriers and cool off periods in place to block impulse spending.

If debt is unavoidable or existing already, then follow these suggestions to divide and conquer:

1. List out all your debts and prioritize them from smallest to largest, keeping track of minimum payments and if some debts can be delayed.
2. Allocate money from your paycheck for your essential living expenses first, emergency fund second.
3. Create a plan for debt payments such as the “Debt Snowball,” which attacks debt from smallest to largest to gain momentum.
4. Remain disciplined and implement an overall financial plan to help you see the bigger picture and enjoy life a little bit. Look at your cash flow in terms of percentages or hire a financial planner if you need to.

Finances shouldn’t be a scary thing and are absolutely necessary for everyone to get a good handle on as they progress. 

Start small and try something, then keep tweaking it until it works best for you.