Financial Planning 101 – Debt Management
Managing your debt may seem like a daunting task but the benefits of careful planning are invaluable. Debt is a major concern for many Americans and for good reason. If left unmanaged, many growing liabilities can eat up your current income, reduce your current and future savings, and even prevent you from buying a car or house. If you could create a plan to pay down your debt and untangle yourself from the institutions to which you are beholden, wouldn’t you? It is not always easy to “find” more cash to throw at liabilities. Instead, establishing a debt management plan is the best way to organize your finances and can help you live a debt-free life.
To develop a plan of action, you will want to make a list of all your outstanding liabilities and interest rates for each and determine which ones are causing the most financial burden. You can request a free credit report from any of the three credit reporting agencies that will tell you if there are outstanding debts you may have missed. Once you have determined which debts to pay off first, you should research whether consolidating any of your loans will allow you to simplify payment plans at a lower rate. Through your new, lower rate, you will end up paying less money in interest and more cash will go to paying down the principal of your loans. Consolidation can affect your credit score, so it may only be a good option if you have a good credit score and can afford the new monthly payments.
Now that you have consolidated your debt or prioritized the liabilities with the highest interest rates, you must plan a monthly payment strategy to stay on track and pay down your debt. When creating a debt management plan, it is important to think back to the previous Financial Planning 101 article regarding budgeting. Your budget will give you an idea of where your money is going each month, which will tell you what expenses you can possibly cut to redirect towards paying down your debt balances. You should focus on reducing unnecessary expenses first such as unused subscription services and expensive recreational activities. Be honest with yourself about your spending and know that minor changes now can have a dramatic impact on your financial freedom down the road.
If you are still finding it difficult to shave down those looming debt balances, you may want to look for ways to bring in additional income. Consider getting a part-time job or joining the gig economy to hone your freelancing skills. It may also be a good idea to negotiate your salary with your current employer if you feel that you are not paid enough given your skillset or position in comparison to peers in your area. Any additional income you can bring in will assist you in paying down your debt, even in the short term.
It is important to remember that some debt can be good to help you build a credit score or accomplish goals, but a lot of extra debt can weigh you down and put a strain on your finances. With forward thinking, you can prevent debt from snowballing into a problem and continue to live the life you want to live.
Read the November 2023 Financial Planning Focus:
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- “College Savings Account Primer” By Angel Irazola »
- “Want a $2 Million IRA in 10 Years?" By Matt Cohen, CFP®, CIMA® »
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