If you are a borrower, following simple, methodical steps can help you reduce and manage your liabilities in the long term. “Liability” and “obligation” are synonyms with “debt,” so debt management specialists use the three terms interchangeably. To gradually curb your debt load and reach financial freedom, you should track your expenses, increase your income, monitor your assets, live within your means, and seek professional advice if your personal situation demands it.
Track Your Expenses
Track your expenses to determine areas where you tend to dole out too much cash, as well as things that are keeping you from attaining economic stability. Living expenses run the whole gamut, from electricity and gas to rent, travel and entertainment, equipment maintenance, interest and telephone. If you own a house, don’t forget to exclude from expenses the principal portion of your mortgage payment, because only the interest portion qualifies as expense. Use an accounting log to monitor your expenses and review them at the end of a specific period – say, on a monthly basis or every two weeks.
Increase Your Income
Advice for debt management is an effective way to slash a person’s liabilities in the long run, but business people often say it is insufficient. To be helpful and effective in the long term, debt advice must go hand in hand with income management. A step in the right direction is talking to a debt advisor, such as with companies like www.ConsolidatedCredit.co.uk that specialise in debt advice. Determine whether your current earnings can sufficiently cover your living expenses, leaving you a nice cash portion to build your retirement nest egg or set up a college fund for the children. If your earnings level is low relative to your expenses, and you think some of the costs are fixed in the short term, try to increase your income. Seek a second job if your personal circumstances are conducive to that alternative; you also can get extra cash from interest income by opening a certificate of deposit or savings account. Talk to your banker and ask him or her the various options available to someone wishing to augment his or her investment income.
Monitor Your Assets
Business people call “asset” anything a person owns and that he or she can use to live, fulfill a dream or advance in any endeavor – be it to go to school, open a business or buy property. “Asset” and “resource” are similar concepts in an accounting lexicon. Your personal assets include cash in checking accounts, retirement accounts, mortgage-free property, debt-free cars and furniture. Anything you own that doesn’t have a single cent of debt attached to it qualifies as asset. Monitor your assets closely to ensure that your quick ratio stays positive. Quick ratio equals current assets – think cash and tax refunds – divided by current debts, which are obligations you must repay within 12 months.
Reduce Your Debt
Try to reduce your debt over time, making sure you live within your means. Remember there are different kinds of debt, some of which are due in the short term. You must repay a long-term debt – such as a mortgage or student loan – over a period that spans several years. A short-term liability, by contrast, is due within a year. Pay attention to debt transactions that you co-sign, because they may become your own debts if the principal borrower does not pay on time, or defaults altogether. For example, if you co-sign or guarantee the credit card application of a minor relative – say, your 16-year-old niece – the credit card company will require you to repay whatever amount your niece spent and refused to repay.
Seek Professional Advice
If you do not have expertise in matters of finance, asset management and debt management, seek guidance from someone who understands the subtleties of liability planning. Professionals such as debt counsellors, certified public accountants, estate planners and financial planners can help you on debt management questions.