Tips for Managing Your Debt
Did you know that 43 million borrowers in the United States hold student loan debt? Debtors carry $1.6 trillion in federal student loan debt alone, which doesn’t include state or private borrowing.
The staggering figures don’t stop there. Americans owe approximately $1 trillion in credit card debts. The average person carries around $20,000 in auto loan debts, and home mortgages account for over $10 trillion in debts.
It doesn’t take a mathematician to see that most Americans have quite a bit of debt! So, what should you do? Is some debt OK? Where do you begin with paying off debts? Let’s tackle this topic, one step at a time.
Let’s Get Organized About Debt
The best first step is to take a complete and realistic view of all of your personal debts. Sit down and organize these expenses, so you can see the list all in one place. From credit cards and student college loans to the car and mortgage bills, put down all loans you have out in your name.
If you are not sure where to start, sites like Credit Karma can help outline any outstanding loans in your name. Such sites can also help you identify debts that you are behind on, meaning that you have not been making payments on them.
If you’re up-to-date on your payments, you can also ask one of the three primary credit rating bureaus directly for your information. Those three companies include Equifax, Experian, and TransUnion. By law, you can get a free credit report, each year, from these corporations.
Once you have everything together, organize a list of your loans and debts. It will help you see everything in black and white.
Is There Such a Thing as “Good Debt”?
Not all debts are created equal. Taking out a mortgage on your home, investing in your education through a higher degree, or getting a bank loan to finance your business can all be smart ways to take out debt - as long as you expect to see a return (or appreciation) of your asset and you can afford the minimum payments on the loans.
Investopedia breaks down the concept of “good debt vs. bad debt” in this article; here’s an excerpt:
“If the debt you take on helps you generate income and build your net worth, then that can be considered “good.” So can debt that improves your and your family’s life in other significant ways.
Bad debt is generally considered money you are borrowing to purchase a depreciating asset. Debt that is not healthy for your finances typically carries a high-interest rate. Carrying too much debt can negatively affect your credit score. If you use too much of a revolving line of credit, like charging up to the maximum on your credit card, then your credit score will suffer.”
Pay Off Debts: Three Useful Strategies
Now that you’ve categorized all your debts and gotten a sense of which ones you should prioritize paying off (such as credit cards or past-due loans), let’s talk about paying them off!
Pay off High-Interest Debts First
One good strategy could be to focus on paying off your debts with the highest interest rates, first. This is the most “expensive” money you borrow. High-interest rates can force you to pay far more than your initial borrowing amount.
Use the Snowball Method to Payoff Debts
Another debt reduction strategy is called the “Snowball Method.” This concept doesn’t order your debt list by highest interest rates, but instead, you organize your list by how much is owed on each.
After listing all debts, from smallest to largest, you begin your game of “catch-up” by first trying to pay off the smallest debt. Once that is paid in full, you will take the money you committed monthly to that debt and add it to the paydown of the next-smallest debt. You continue until that is paid in full, and continue the process.
Here are the steps to the snowball method (more details and examples can be found in this article)
List all debts from smallest amount to largest amount. Disregard interest rates and focus only on what is owed.
Make the minimum payment allowed on all debts - except the debt with the smallest amount.
Pay as much as you possibly can (comfortably) on the smallest loan.
Once the smallest loan is paid off, continue the cycle with the next-smallest (now smallest) debt on the list, and so on.
Some people appreciate this plan because you will see results quickly. Crossing even one small loan off of the list of your monthly bills will give you motivation! That excitement can keep you committed to paying each one down. Making the process more game-like, and reward-oriented, can make people stick to the process with more dedication and energy!
Seek Professional Help
As I often say, the best part of my job is to help others. I enjoy helping families find ways to save money, plan for their futures - and yes, pay off their debts - no matter the starting point. I am happy to advise you in creating a plan for debt payoff and/or debt consolidation that works best for your individual needs.
Tailoring a plan to a person, instead of a general economic strategy, is useful because it is built just for you. We create the rules and payment plans that you can live with!
Subscribe for Further Updates
It can be tough to keep tabs on all of the programs, changes, tax breaks, and “rules” as they come and go. For example, when it comes to student loan debt, there used to be a Public Service Loan Forgiveness program, which was helpful for many educators, and just last week, the Supreme Court issued a ruling that struck down a huge federal student loan forgiveness program.
It is a lot to keep track of, but if you want to take another smart step to improve your finances, subscribe to our newsletter. We strive to keep our subscribers in the loop with program updates such as these. Please reach out to my office at (507) 304-7017 with any additional questions.
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