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How to Tackle Your Debt

Share current LOB: WealthManagement

Many people think of debt as a four-letter word. You shouldn’t. After all, the ability to borrow allows you to have the things you might not be able to afford otherwise. Chances are you’ve borrowed--or one day will borrow--money to buy a house, purchase a car or finance a college education.

 

That’s OK. The key to responsible borrowing isn’t avoiding debt but knowing your limits. That means understanding how much you can afford to borrow given your income and lifestyle. There really is no one-size-fits-all approach to debt repayment—a lot will depend on your circumstances—but there are smart strategies that’ll help get you started and keep you on track.

Step 1: Know How Much You Owe

Before you can begin to pay back your debts, you need to be clear on what they total. Start by taking a personal financial inventory. How much do you owe and to whom? What are the interest rates on the loans? Once you have that information, calculate your monthly income and expenses.

 

Don’t be intimidated by this task. Add up the numbers the old-fashion way with pen and paper, or look online for a budgeting worksheet. What’s important is that you do it. Once you have a clear tally of how much you owe, as well as how much money you have coming in and going out, you can start coming up with a plan to pay down your debt.

Step 2: Understand Your Interest Rates

In general, you should first focus on debts with the highest interest rates. For many people that means credit cards. Gather your latest statements and take a look at the rates. If you’ve held a card for a long time, you probably don’t even remember the interest rate.

 

Conversely, your mortgage and student loans probably have relatively low interest rates. While you’ll want to keep up on your regular payments, of course, it might not make sense to make extra payments on low-rate loans if you have high-rate debts racking up a ton of interest.

Step 3: Pay More Than the Minimum

Paying the minimum on credit cards can prove costly over the long run. Let’s say you have $5,000 on a card with an interest rate of 18%. Believe it or not, if you only make the minimum payment every month it can take nearly 23 years to pay off the balance. During that time you’ll fork over almost $7,000 in interest. But pay, say, $250 extra every month, and you’ll be debt-free in just two years.

 

If you don’t have any high-interest credit card debt, consider making extra payments on your mortgage. A homeowner with a 30-year mortgage at 6% can save more than five years and $50,000 in interest simply by putting an extra $100 every month toward the home loan.

Step 4: Don’t Neglect Your Savings

Although it might be tempting to pay off debts as quickly as possible, don’t do so at the expense of savings. If you’ve got some cash left over after meeting all of your monthly obligations, first review the balances in your savings accounts before writing another check to a lender.

 

Start by ensuring that your emergency fund has enough to cover six months’ worth of living expenses in the event of an unexpected illness or job loss. Even if it’s just $50 a month, put it away. While six months of living expenses seems intimidating, each contribution will get you closer to your goal. Then, think about socking away more for your retirement. If nothing else, contribute enough to your 401(k) to get the company match.

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Many people think of debt as a four-letter word. You shouldn’t. After all, the ability to borrow allows you to have the things you might not be able to afford otherwise.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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