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Could Dividends Break Your Debt Cycle? By guest writer Ali Thompson

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Could Dividends Break Your Debt Cycle? By guest writer Ali Thompson

Could Dividends Break Your Debt Cycle?

The UK has a problem with personal and household debt. According to financial management charity The Money Charity, the average per-adult debt in the UK has reached £31,569, which sits at an astonishing 111% of average earnings. Clearly, having a debt load that entirely outstrips earnings is both harmful to financial health, creating an unsustainable financial situation and limiting options for the future. Applying savings to your own personal financial choices is an important step to overcoming this problem, but as a long-term solution, investing in dividend-based stocks and shares can provide real and permanent debt relief.

Investments as a debt breaker

The nature of debt varies greatly depending on the person, the level of credit they’ve taken up, and the types of product they have committed to. As a rule of thumb, it is always better to pay debt off as soon as possible – any money paid in interest rates is inherently a loss of value for the consumer. However, there are occasions, such as balance transfer credit cards, where it doesn’t necessarily make the best financial sense to pay off the debt quickly.

Instead, money can be moved elsewhere, and this is where investments and the ensuing dividends can be beneficial. One of the key ways you can tackle debt is through increasing your income levels. Typically, this is through a second job, looking for overtime or promotion at work, or finding a vocation or internet business that you can sell wares through. Investments offer a way to increase your income in this manner, too.

2019 saw dividend payments rise to higher levels than ever, with The Guardian noting over $500 billion in dividend payments were made throughout the year. While dividend payments are now growing at a slower pace, they remain a very relevant and powerful way in which to increase your income. Even a modest movement of your funds into a solid dividend-led fund can bring a considerable boost to your income and help you to escape debt that much quicker.

A long-term solution

It’s easy to look at debt as purely a function of poor financial management, but several studies have established a strong link between psychology and the process of becoming indebted. According to American-based science magazine, Scientific American, trials have established a clear link between psychological habits, personality traits, and the process of accumulating debt. A common suggestion made by psychologists to tackle this is through forming positive habits. Investment, and particularly dividend-led investments, offer a helpful route via which to achieve this.

All forms of investment preach patience when putting money in, and dividend schemes apply this to an added level. Whereas it can be tempting to pull and reinvest at frequent intervals when it comes to certain types of investment – forex and cryptocurrency being notable examples – dividend-led investing encourages patience. A constant supply of cash from your investment will provide inspiration to hold on to an investment over a number of years, and help to train you in financial responsibility that may be lacking otherwise.

Improving your financial skills

According to The Balance SMB, one of the most important parts of picking a dividend stock is being able to assess the stock you’re interested in and make a full evaluation of their qualities. Most important among this is checking the balance sheet, and ensuring that you are satisfied that the business will live up to its advertised rates. This will also help to indicate to the buyer the long-term health of the company and its ability to continue providing value on the investment, which make it all the more appealing as an option.

Again, many of these skills are part of the budgeting process that form an essential part of everyday financial management. The use of debt and consistent search for further credit lines is often a result of poor financial management and lifestyle creep, with the result being overspending across numerous categories as opposed to control over financial budgets and luxuries. The methodical process that is made necessary to selecting a good dividend based fund choice can easily be applied to day-to-day life and, in many cases, will start to become habit without any concerted effort.

Dividends provide a solid income that can, when selected properly, help to provide a base on which to get out of a situation of indebtedness and onto solid financial footing. What selecting a dividend investment also does is provide a financial education that can entirely transform the fortunes of someone finding themselves in perpetual debt. Instead of feeling stuck in the same old habits and ways of operating, the methodical and analytical approach required to make a success of any foray into the world of investments will help to create a set of financial principles that serve the investor well for the rest of their life.

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