Dealing with debt? You aren’t alone. Debt can be a powerful tool that allows us to take a step forward – like borrowing for education or for the purchase of a home. Sometimes it piles up faster than we can pay it down – and it can feel scary and overwhelming. Whatever the case, here are 4 of the key points I make to clients when discussing debt.
- Prioritize: When trying to eliminate debt, it helps to prioritize. Work with your financial planner to establish a pecking order of debt & savings goals. For example: emergency fund first, credit cards next, student loans last. When establishing priorities, there may be financial factors (like interest rates) and non-financial factors (like short term “fun” goals) to consider. Once you’ve set your priorities, do your best to stick to the plan.
- Payment Plan: A big, unexpected bill can easily disrupt your careful planning. But instead of raiding your emergency fund to cover the expense, inquire about setting up a payment plan. Some creditors will happily arrange for low or no-interest installment payments over several months. For example: my family recently hit our deductible after a health care event. The hospital set up an interest-free installment plan for me upon my request. Now we’re able to pay down the bill while preserving our emergency fund and honoring our debt priorities. It’s hard to say no to an interest-free loan!
- Principal: If you are making extra payments on a debt, be sure to apply them to the principal amount on the loan. Doing this correctly will shorten the life of your loan and decrease the total interest you pay. Some platforms will treat extra payments as “early payments” (next month’s principal & interest) by default. Maximize the benefit of your extra payment; make sure it is applied directly to the principal balance of the loan.
- Preempt: The best way to decrease debt is to incur less of it. Try to preempt a sudden consumer debt situation by establishing a solid emergency fund, developing healthy spending habits, and structuring checks and balances for impulse purchases. While you can’t prevent things from “coming up.” you can do your best to defray their impact on your finances.
Need help? More questions? Meet with your fee-only financial planner to discuss, or contact us.