Managing Debt

At some point in your life you’ve likely had to address a debt payment.  It may have been after college graduation when those student loan payments began, or it may have been later in your professional career when you started paying-down grad school or law school loans.  Your first big debt may have been created through the purchase of your first home or condo.  You may have also chosen to finance the purchase of a car or truck, or perhaps opted to take an epic vacation for which you’d pay overtime. All of these big spending events may have left you with some level of debt.

Your income and spending choices determine the amount of debt you choose to carry.  Each person (and family) has an approach that works best for them when it comes to spending each month.  These spending choices may be conscious decisions or, in a pinch, become a more reactive one to an immediate need.  For example, if your air conditioning system stopped working this afternoon and the only alternative was a new unit, you may opt to pay via credit card if you didn’t have six thousand dollars just laying around.

This is an example on why it’s important to have an adequate cash reserve for “life events”, both big and small.  Sometimes you may be prepared but still be surprised with a big-ticket expense.  What if you already have outstanding debt or are considering taking on more debt in the near term?  What is the best way to do so responsibly (with proper financial planning in mind) so you don’t create cash flow difficulties?

The key to managing debt is an awareness of knowing exactly where you stand in the following areas:

• • • First, identify the current outstanding liability/s and due date/s each month.

• • • Second, list the name of the lending institution. Knowing what you owe, and to whom, is important.

• • • Third, what’s the current interest rate you are paying on each debt? Will it adjust or is it fixed?

• • • Finally, how long will it take, in months or years, to pay off each debt? Clearly defining the duration for each debt is critical.

Putting these numbers on an excel spreadsheet is a good starting point.  This also represents a great building block in completing a portion of your personal balance sheet.  Updating your debts periodically, and then reflecting on how you feel about what you see, may lead you to changes in spending behavior and ultimately lowering your debts levels.  Answering the above questions creates clarity that is often not top of mind so that you may be more empowered in managing your debt.

We all tend to have different opinions on debt and how we choose to manage it.  Some of this may come from our childhood lessons from how our parents did, or did not, address debt.  Some of it may have been learned by experience in managing a credit card, car, and/or mortgage payments.  Often, it’s the small spending and savings choices that we make every day that can add up to determine what debts we carry, and for how long.

Knowing the facts on where you stand from a debt perspective allows you to be proactive concerning your spending choices.  It may not bother you to know you have another 15 years to pay on the mortgage.  Alternatively, it may be important to you to have the mortgage paid off prior to retirement.  Student loans for college tuition may have been your borrowing experience.  Perhaps allowing your children or grandchildren to avoid this approach is a priority to you.  Debt is personal, and often a choice you make based on your own personal spending and saving priorities.  Should your cashflow shift suddenly, often the decision is made for you (instead of by you) as creditors are ready to lend money on their terms, which are often less favorable.  If you find yourself managing more debt than you are comfortable with now, here are several steps to consider once you’ve clearly identified your debt as outlined above:

• • • If possible, avoid making just the minimum payment. Often you may set up automatic payments each month.  If the balance is too large for a single payment, consider a series of payments to get to zero.  What would doubling the minimum payment do?  This may shorten the time to pay and allow that extra money (once the debt is paid) to be applied to another job description, savings or investment that is important to you.

• • • Consider an unsecured loan from a bank or lending institution, such as SoFi.com, to consolidate high interest debt. Reducing interest charges allows more of your payment to be applied to the principal, thus shortening the time you are in repayment.

• • • Don’t be so focused on debt paydown that you neglect other areas of your financial well-being. For example, it’s wonderful if you want to pay off your mortgage in an accelerated time frame but not at the cost of limited investing now.  Factoring in cash reserves, fun money, and future income needs (including debt) is a balancing act.  Having no housing debt may serve your long-term plans but you will also need income from investments to survive.

• • • Look ahead, December and year end spending will be here in five months. What can you do now to avoid having to borrow to make the essential and discretionary purchases important to you and your family?

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