DEBTS MANAGEMENT

Author ; Tamilselvi Bhavanandham. Co-author; Ramya Aravinth

Live within your income even if you have to borrow money to do it

Josh Billings

Debt Management
What is debt management ?
Debt management is nothing but a plan to get your debts under control.

WHY DEBT MANAGEMENT?

Minimize Stabilize

interest costs.

local government financial positions. the governments borrowing efficiency.

Maximize

Who can assist you?

Your Hire

underwriter.

a financial advisor/swap advisor. advice from experienced counsel.

Seek

Review

guidance of the

GFON.

FORMULATED VIEW
Principal = borrowed money. Interest = the amount you pay on principal (borrowed money).
Interest = Principal x Interest Rate x Time

Classification of people under debt situation

People who are under serious debts are classified into three categories:
Acute

debt. debt.

Chronic Life

change debt.

Acute debt
Acute debt is a situation in which the client has negative cash flows and unable to repay the debts though he has enough assets to cover his liabilities or positive net worth.
REASONS LEADING TO THIS SITUATION:

Lower term of repayment or highly monthly payment. Reduction in income. Increase in expenses. Increase in interest rates.

Chronic Debt
This is a long term situation. Though they have cash flow, they need to make immediate repayments. He will be having a negative net worth which can lead him to life change debt situation. REASONS LEADING TO THIS SITUATION:

Highly unsecured loans like personal and credit card. Loan of value of investment assets.

Life change debt

This is the situation where the client will be running negative cash flows and have negative net worth, where he is NEITHER able to make monthly repayment NOR will be able to become debt free by selling off assets.

REASONS LEADING TO THIS SITUATION:

High unsecured loans. Loss of value investment assets.

Lower term of repayment.

Increase in interest rates.

VALUE ERODING DEBT

This is the situation where the client would have enough cash flow to make the monthly payments ,and, along with it his net worth would also be positive.
REASONS LEADING TO THIS SITUATION:

Higher cost of debt when there was opportunity for getting low cost debt.

Longer payment terms though the client could repay early.

RATING DEBT STRESS

The Associated Press Poll Stresses Of Being Buried Under Debt
(1,002 adults, taken 3/24/08-04/03/08, +/or - 3.1% margin of error)

60% 50% 40%

51% 44% 31% 29% 27% 8%

Low Debt Stress

30% 20%
10% 0%

23% 4% 3% 6%

15%
4%

High Debt Stress

Muscle Migraines Tension (Back (Headaches) Pain)

Severe Anxiety

Ulcers (Digestive Problems)

Severe Heart Attack Depression

Which of the following illnesses and other health problems, if any, have you had in the past 12 months?

Differentiating Between Needs, Wants And Desires

Need
To drink:
Water Bottled Water Cola An expensive watch--Rolex

Want

Desire

To tell time:
Use free available An inexpensive clocks watch--Timex

Transportatio n:
Use public transportation Used car New carRolls Royce

Understanding Opportunity Costs For Needs, Wants And Desires

Opportunity Costs is the cost of passing up the next best choice when making a decision.

APPLYING OPPORTUNITY COST

Realistically, few people will go through life only drinking tap water. Few people will be able to invest for 76 years during their lifetime.

The purpose of this example is to point out how a shift from spending on wants and desires to spending on needs and then saving and investing the difference can have a profound I Your values determine your perception of needs, wants and desires. Everyone has different values.

STRATEGIES TO OVERCOME DEBT MANAGEMENT

Data

gathering. Analyzing the current financial position. Classifying the current situation. Determining the strategies. Implementation.

Guiding Principles
Borrowing

for operating expenditures is generally unsound Borrowing for capital projects is considered essential financial decision-making Borrowing for capital projects requires effective debt management

LEARN TO AVOID DEBTS

Borrow as little money possible at the lowest interest rate possible and for the shortest timeframe possible. Live within your means. Establish an emergency fund to avoid debte.g. $1,000 then 3-6 months expenses and then 6-9 months expenses. Practice delayed gratification save for items and pay cash. Credit cardspay the balance off in full each month or consider canceling the cards in order to control your deficit spending. Understand the difference between Good Debt helps to build your future net worthand Bad Debtdiminishes your future net worth.

HOW LONG WILL YOUR DEBT MANAGEMENT LAST?

A debt management plan will last as long as it takes to pay off all of your debt. For this reason, the key to success is to pay as much as you can each month so your debt is paid as fast as possible.

Query