Risk management is the practice of assessing the potential outcomes of any given situation, and taking steps to ensure that the probability of negative outcomes are substantially diminished. In this particular article, I’ll review a specific case of risk management as it pertains to credit card debt. Credit card debt is without a doubt one of the biggest sources of anxiety and worry today. It has destroyed marriages, homes, and lives. By taking some simple steps, you can learn to avoid it.

The first basic step of risk management comes before taking action. It involved thinking of the worst possible thing that could happen should you go through with your decision. In this particular case, the best time to make a decision is before making a purchase. If you consistently stop and make some conscious choices before buying things on credit, you’ll find it much easier to stay out of debt.

In this case then, what is the worst that can happen? You buy the item, the bill comes a few weeks later, and you don’t have any money. You can barely make the minimum payment if that. What happens then? You continue to make the minimum payment for several months. The interest compounds, and you will likely pay at least three or four times the original price of whatever it is you are considering buying.

The next step is to determine how likely this is to happen. What are the odds of you paying only the minimum amount on your next credit card bill? The best way to determine this is to look back over your previous payments. Where they for the amount in full, or only the minimum. This is a good indication of your ability to pay next time.

Once you’ve figured out the worst possible outcome, along with the likelihood of it taking place, the next step is to try and minimize it from happening. In most cases, this is simply to not make the purchase. Of course, this is much easier said than done. One trick is to think about it over night, and if you still want or need to buy it in a day or two, then go ahead and make the purchase. Another possibility is to pay cash for the item. If this isn’t possible, then you can move on to the next step.

The next step is to prepare for the worst possible outcome. In this case, buying something that you’ll end up paying three or four times the amount of, since you will likely be paying the minimum payment on your next bill. Take a good look at the item you’re considering. Imagine paying three or four times and amount. Is it really worth it? If you think it is, then go ahead and make the purchase. If it isn’t, then congratulations. You’ve just saved yourself some money.

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