I’m a CFP: These Are the Top 5 Questions People in Debt Ask Me — And What I Tell Them
Written by
Nicole B. Simpson, CFP
Edited by
Amber Barkley
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People who are focused on accumulating wealth will oftentimes ask how one manages their debt. After all, several life goals and objectives carry a hefty price tag that requires one to borrow extensively to achieve stated goals. For example, people who desire to attend college, purchase a car and eventually purchase a home will take a loan to pay the expense over a stated period.
If one adds credit card debt and personal loans to the mix, a debt management strategy should be employed to effectively manage the debt and still achieve the goal of wealth accumulation. So, when people ask me how to manage debt, there are five considerations that will help you reduce your liabilities more efficiently.
‘What Should I Do First, When It Comes to My Debt?’
List all your current liabilities.
It makes sense to first outline all the debt one has and identify the amounts outstanding, the interest being charged and when the debt is scheduled to be paid in full. Before creating the strategy to pay it down, one should further break down if the debt is manageable.
A perfect way to determine that is looking at student loans. If one has both subsidized and unsubsidized loans, it makes more sense to pay off the unsubsidized more rapidly, because the interest compounds more aggressively.
‘How Do I Determine How Much I Can Afford To Put Toward Paying Off My Debt Each Month?’
Identify how much money you can allocate towards paying down the debt.
Creating a budget to identify expendable resources is necessary, because it will guide your decisions regarding how to pay down the debt. For example, a mortgage payment is debt, but it may not make sense to accelerate payments, because it can offer a tax deduction in the current tax year and the interest rate is set, unless you selected an adjustable rate.
‘How Can I Develop a Plan To Manage My Finances Effectively?’
Pick and implement a strategy.
There are two popular strategies to pay down debt. The first is based on paying off the higher interest rates first and working backward until all the debt has been paid down. The second strategy is paying off the smallest balance first and working your way up.
As the expert, I generally suggest paying off the higher interest first. The cost to borrow matters.
Look at it through the lens of credit card usage. One credit agency may charge extremely high interest rates, while another charges a modest rate. Based on the balance, the higher rate will cost the consumer more over time. With a set dollar amount earmarked to pay down your debt, pay the minimum payments on the cards and aggressively pay down the highest interest rate one credit card at a time.
‘Should I Explore Options About My Debt? What Should I Do?’
Consider consolidating the debt.
A great savings strategy can be to consolidate your debt and make one payment at a lower interest rate. If one has credit card debt, review the benefits to see if any cards offer 0% interest on transfer balances. One must take note of the timeline for repayment and the interest rate thereafter. If your budget allows you to pay off the debt within that stated period, it will help you save over time.
Other vehicles may include taking out a personal loan or a home equity loan, if the interest rate is lower.
‘How Often Should I Review My Debt Plan To Ensure I Stay on Track?’
Review the plan periodically.
Chart your progress. If the goal is to ultimately accumulate wealth, leveraging debt to achieve that goal is possible. However, one wants to make certain the debt can be managed and eventually eliminated after a stated period. Finally, once you have become accustomed to repaying the debt, when it is erased, the money can be reallocated to savings helping you to achieve that wealth accumulation goal.
The notion that it’s easy to get into debt and a challenge to climb out is true. However, taking these five suggestions into consideration will guide you in accumulating wealth while ensuring any debt that you do acquire is manageable.
Editor’s note: Dr. Nicole B. Simpson is a dedicated certified financial planner and the CEO and founder of Harvest Wealth Financial.
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