Tools and methods to manage debt the right way

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As a concept, debt is very familiar and, in principle, it is usually easily understood. However, we sometimes do not take into account how debt can affect the functioning of the economy at all levels. The obligation acquired to repay the funds that have been provided by third parties is called debt or financial debt.

This is one of the basic mechanisms for the functioning of the economy. However, the individuals' or companies' financial health must always be taken into account. When applying for a loan, we must be aware that we have to add to that amount other expenses, such as fees or interest.

In order to meet these debts, a possible option could be to group the amount of all the loans into one. This consolidation leads to a single monthly payment, the amount of which will be less than the sum paid previously. It is true that the repayment term will increase and, as a result, the final cost, due to the interest.

Consolidating our debts is not especially complicated, although it does require each case to be studied by a mediator company. This company analyzes the remaining debts, interest and repayment periods. Once the operation has been approved, the negotiation of the new repayment conditions with the different banking institutions will begin.

We must consider that debts accumulate through credit cards, personal loans, mortgages and car loans. If we do not have control over our expenses, it can affect both our financial and physical health, as it generates frustration, anguish and helplessness. Limiting what is spent with the credit card can be a first step to avoid an excessive debt.

But, how should we manage and pay the debts? There is no magic formula, but a plan should be put in place to meet them. Assume that there is a debt, and try to limit the expenses. One aspect to take into account when managing your debts is to identify their size, so you know what money you can use to pay them.

Another option is to make a list of the fixed and variable expenses with their amounts. This way, you can detect any non-essential expenses. Another way would be to use different methods to get out of debts. One of them is called the avalanche method. This method focuses on paying the debts that have a higher interest rate.

Once the debt with the highest interest rate has been settled, the money that was used to pay it can now be allocated to the next debt with the highest interest rate, and so on. This method may take longer to reflect the reduction of debt and can sometimes be discouraging for some people.

Another tool that helps to reduce debts in a simple way is the debt-snowball method. The key to this method lies in eliminating the smallest debts first. That is, it is based on allocating an extra amount to pay off the smallest debt first while also making minimum contributions to your other debts until the smallest one has been paid off.

Then, the money used to repay the first debt goes towards paying off the second-smallest debt. This has become one of the most effective methods for getting out of debt, as it involves making small and simple payments.

The results are easier and quicker to achieve, and your motivation is boosted as you are able to see closer the end of that debt. Once we have decided on the method to follow, we must be consistent when preparing the plan and assessing the borrowing capacity.

One of the keys to achieving these objectives is being well organized. For this purpose, there are a vast range of applications that make this task easier, whether for those who want to reduce their debts or for those who want to save.

An example of these applications is BBVA's My Everyday Operations, which helps you to stay on top of your money. With it, you can see your income and sort the expenses by category. As a result, you will be able to plan better and make decisions when it comes to saving. In addition, you can view the projected transactions related to both income and expenses.