Debt

Are You Overwhelmed By Debt?

Why or how do so many people get into trouble with debt? When does it become a problem? There are so many reasons, such as job loss or, health problems, but overall it is a disconnect between income and spending, and not enough focus on financial management.

I’d like to share a few simple ways to reduce your debt and help to minimize its use in the future. If you keep it simple, you are more likely to be successful.

Stop incurring more debt: You can’t get out of debt if you are still using your credit cards. Do not increase your debt or you will never get out.

Emergency fund: By building up an emergency fund, you are less likely to take upon more debt for something unexpected. For now, it can be around $1,000 to start. Ideally, you will want to work towards 3 to 6 months worth of expenses, but it doesn’t make sense at this point to save $10,000 and simultaneously have a $10,000 credit card balance.

Budget: If you are serious about reducing your debt and improving your financial situation, you need to take the time to make a budget. You can use software, such as Excel or Quicken, but a very simple and effective way is to use envelopes. For example, if you are paid weekly by your employer and spend an average of $200 a week on groceries, then place $200 in an envelope labeled groceries. When you go food shopping, bring this envelope so that you can only spend$200 or less. This can be done with all other expenses. It is simplistic, but if it is done right it is extremely effective. My father taught me this one.

Know what you owe and prioritize: Make a list of all of the debts you owe, including credit cards, auto loans, equity loans, mortgages, student loans, etc. Now you need to work at chipping away those debts. The rational place to start is with the highest interest debt, but I don’t recommend this. You should actually try to pay off the smallest balances first because it will give a sense of accomplishment. Once the smallest is paid off, then use that payment toward the next balance. Finances are extremely psychological, as most of our financial decisions are emotional-based.

These few steps are a good place to start to manage and reduce your debt. If you are serious about debt elimination, you will not look for shortcuts, but rather ways to increase your income to pay off your debt sooner and take control. Focus and simplicity are the keys. If you need more help you can contact my office. Additionally, there is an excellent book on this topic that parallels my thoughts on debt, entitled “The Total Money Makeover” by Dave Ramsey.

Is Debt Really That Bad?

Is it bad to have debt? Should you pay off your debt early? What about credit cards? These are all questions to consider regarding your personal and business finances. Let’s take a look at the good and bad.

If you view debt as a financial tool to help you to achieve your goals, then debt is a good thing. Some benefits of debt:

  • Virtually all homeowners take out a mortgage when purchasing their first home; otherwise they most likely would not be able to purchase a home.
  • A loan for your business may help you to expand your business to help it grow, such as an equipment loan or a line of credit to use during lean times.
  • By using debt it may help you to conserve your cash so you do not have to deplete your savings to purchase a vehicle, for example.

Now, the ugly side of debt:

  • If the interest rate of your debt is very high, then you may end up paying much more than the original loan balance. This may be true with credit cards.
  • Debt payments that are too high compared to your income will put a strain on your finances.
  • If your income goes down for an extended period of time, while having a lot of debt, may result in bankruptcy, foreclosure, and a poor credit score.