4 STEPS TO MASTER YOUR DEBT

Debt comes in different ways. Maybe you lost your job, experienced a short-term illness, or simply mishandled your income. Regardless of what happened, your debt should not prevent you from living a happy and fulfilling life.

If you fail to make your payments, your credit status may change, which can affect your life in many ways—including higher costs, fewer job opportunities, reduced investment opportunities, and difficulty obtaining credit to buy a home or car.

Here are 4 steps to reduce or eliminate debt.

Using savings to pay off debt may be one of the most difficult options because it requires using money you have worked hard to accumulate. However, reducing debt can strengthen your overall financial position.

Before you can obtain a loan to purchase a car or home, creditors typically review your credit history to help determine whether to approve or deny your application.

A strong credit history can provide you with more opportunities to achieve your financial goals.

Debt consolidation combines debts from several creditors into a single new loan to pay off existing balances.

When done successfully, debt consolidation may help reduce your interest rate and lower your monthly payment.  However, consumers sometimes use consolidation to pay off credit card debt and then resume using those cards. This can provide almost immediate financial relief, but it can also result in paying more total interest over a longer period.

Debt settlement occurs when a creditor agrees to accept less than the full amount owed as payment.

It can also involve collectors continuing to contact you regarding the money you owe. Some debt settlement arrangements may require you to stop making payments for a period of time while negotiations take place.

Although debt settlement may provide debt relief, it can damage your credit and may make future lenders more hesitant to extend credit to you.

Bankruptcy may allow certain debts to be discharged through the legal system. Depending on your circumstances, bankruptcy may provide relief from debts you are unable to repay. However, bankruptcy can significantly affect your credit and your ability to borrow money in the future.

Because bankruptcy has serious financial and legal consequences, consider consulting a qualified professional before making this decision.

As you can see, there are several ways to deal with debt. My preference is to help people develop a strategy for paying down debt using their income and financial resources whenever possible.

Every day, you make financial decisions that affect both your present and future financial situation.

Because of this, it is important to understand where your money is going.

Review your spending regularly and identify expenses that may be preventing you from achieving your financial goals.

Start by tracking your income and expenses.  As you develop your plan, pay attention to the activities and purchases that consume your money.

For example, suppose you spend $7 per day on breakfast. That equals approximately:

• $49 per week
• $196 per month
• $2,352 per year
• $11,760 over five years

If you have a credit card balance of $10,000 or $11,000, redirecting some of that daily spending toward your debt could make a meaningful difference.

Then look at other areas.  How much are you spending on lunch and dinner?  How much are you spending on entertainment, subscriptions, hobbies, and other discretionary purchases?

Your plan should allow you to pay down debt while gradually creating a stronger financial position so you can pursue other financial goals. 

Remember:  It is not only what you make that matters—it is what you keep that counts.

Many people wonder whether they should pay down their credit cards or build their savings first.

The answer depends on your individual financial situation, interest rates, available savings, emergency needs, and financial goals.

Suppose you have a credit card balance of $11,000 with an annual percentage rate of 28%.

At that rate, interest costs can become extremely high over time, especially if you make only minimum payments or continue adding new purchases to the balance.

This is why high-interest credit card debt should generally receive significant attention in your financial plan.

You should still consider maintaining money for emergencies and essential expenses. However, earning a small return on savings while paying a much higher interest rate on credit card debt may work against your financial goals.

For example, earning 1% on savings while paying 28% interest on credit card debt creates a significant difference in your overall financial position.

The appropriate balance between saving and paying debt will depend on your circumstances.

Following your financial plan every day can help you become more intentional with your money.

Over time, this approach can create a lifestyle in which you:

• Spend more carefully
• Make fewer impulsive purchases
• Understand where your money is going
• Reduce unnecessary debt
• Build savings
• Work toward larger financial goals

Small daily financial decisions can create significant long-term results.

Becoming debt-free can be an excellent financial goal, but debt itself is not always bad.

When you decide to improve your financial situation, you begin a process of personal and financial growth.

Start with small goals. As you accomplish them, your goals may become larger and more meaningful.  You may eventually become more comfortable using debt strategically when appropriate.

The important thing is to understand the difference between debt that helps you accomplish a productive financial objective and debt that simply creates unnecessary financial pressure.

Being $5,000 or $15,000 in debt should encourage you to look for ways to improve your financial situation, increase your income, reduce unnecessary spending, and develop better financial habits.  Continue learning.  Continue improving your skills.  Continue looking for opportunities to increase your financial resources.  Debt, when used wisely, can sometimes help you accomplish important goals for yourself and your family.

The key is learning to manage debt responsibly rather than allowing it to manage you.

Regardless of the financial decisions you make, work toward maintaining a strong financial reputation with future creditors.  Debt, when used wisely, can help you accomplish personal and financial goals—but success requires discipline, planning, and a clear understanding of how your money is being used.

A strong financial plan can help you take control of your debt, improve your cash flow, and move toward greater financial stability.

Art De La Rosa
Financial Planner
Wealthy Dollar

23+ Years of Experience
Financial Planning for Everyday Americans

Website: WealthyDollar.com