3 Steps to Managing (and Paying Off) Debt
If you’re like most Americans, you have a pool of debt that you’d like to eliminate. And if you’re under the age of 35 chances are, according to the Federal Reserve’s Survey of Consumer Finances, that you have an average debt of $67,000—a number that is projected to grow as you age (Americans between the ages of 35-44 have an average debt of $133,100) and take on additional expenses like owning a home or childcare expenses.
To help you maintain a healthy financial position, it’s a smart move to consider all of your options and make a plan for managing debt. In an effort to help you get started, we have identified 3 steps to managing debt and tips for paying it off in the process.
1 – Make a Budget (and Stick to It)
If you don’t already have a budget, there’s no time like the present to start one. There are many benefits to starting, and using, a budget—especially when you have debt. For example, a “budget will help you make better decisions about your money and give you an idea of how much you can afford to put toward your debt each month.” However, it’s important that you “don’t try to manage your expenses in your head; seeing the numbers on paper lets you see the bigger picture without having to rely on your memory. Your budget can also help you see where you might be able to free up money that you can put towards your debt” (The Balance).
2 – Prioritize Debt Payments
Have you ever heard the terminology good debt vs. bad debt? How do you know which is which, when it comes to looking at your debt? A good rule of thumb is that if it’s tax deductible on your returns, it’s most likely good debt, i.e. mortgage or student loans. On the other hand, bad debt consists of things like consumer loans to finance your lifestyle like auto loans, furniture loans, credit card debt and payday loans” (CNBC).
In general, it’s recommended that you avoid bad debt (which is usually associated with items that depreciate over time). With that said, we understand how good and bad debt can sometimes be inevitable. Given that, try to remember the motto of “everything in moderation” when it comes to debt—both good and bad.
3 – Consider Debt Consolidation Options
Depending on your situation and goals, debt consolidation may be a good option. What is debt consolidation? Simply put, “debt consolidation is a personal finance strategy that rolls high-interest debts into a single, lower-interest payment. It can reduce your total debt and reorganize it so you pay it off faster” (Nerdwallet). If you’re debating this option, below are two resources that can help you through the decision making process:
- Use a Debt Consolidation Calculator: This calculator, provided by American Heritage Credit Union, is designed to help determine if debt consolidation is right for you. First, fill in your loan amounts, credit card balances and other outstanding debt. Then, you will be able to see what your monthly payment would be with a consolidated loan. Try adjusting your terms, loan types or rate until you find a consolidation plan that fits your needs—and most importantly your budget.
- Speak with an Expert: As is the case with many financial decisions, the terminology and parameters can sometimes seem like they are in foreign language. That’s why, before you make the decision to consolidate debt (or any other major financial decision) it’s a good idea to chat with a local financial expert, who can help you navigate your options. For example, American Heritage Credit Union offers more than just a menu of banking services. To best serve our community, we provide advice and guidance designed to improve our members’ financial management skills, including counseling and budgeting assistance program.