How would you define personal debt and what are the most common reasons that someone gets into debt?
Marc Henderson: Personal debt, also known as consumer debt, is money owed by an individual to someone, typically an entity like a bank. Most Americans acquire debt as a result of purchasing goods and/or services that they want or need, but don’t have enough money to buy.
There are many forms of personal debt and they are commonly categorized in these five areas: mortgages, student loans, credit cards, auto loans, and personal debt. The other thing to consider is if the debt is secured vs. unsecured. Secured debt is backed by some form of collateral. In the event you as the borrower are unable to pay your debt, you are contractually obligated to return the collateral to the lender. An example would be your home. If you are unable to pay your mortgage, you risk losing your house. With unsecured debt, like a credit card, there is no collateral, and you risk paying more in fees and interest.
MH: One of the misconceptions about personal debt is that one should avoid it. I believe personal debt is amoral, meaning it is neither good or bad, but many of us fail to leverage it to our advantage. One way to leverage debt to your advantage is to use it to acquire assets that appreciate in value, like the purchase of real estate. The goal is to be wise with debt and to leverage it in such a way that it increases your net worth.
What is the first thing that someone hoping to lower their personal debt should do?
MH: The first step in lowering your personal debt is taking a snapshot of where you are today. I suggest the old school method of using pen and paper. List all of your debts to get an account of where you are. I also suggest getting an updated credit report to ensure there are no other outstanding debts that you may have forgotten. Federal law allows you to get up to three free credit reports every 12 months by going to annualcreditreport.com.
What other tips do you have for someone trying to lower their personal debt?
MH: I recommend a four-step approach.
Step 1: Organize. Take time to list and answer the following questions: Who do I owe? How much do I owe? And what is it costing me (i.e., what is the interest rate?)?
Step 2: Prioritize. Once everything is listed, the next step is to create a plan to pay off the debt that is costing you most. List your debts beginning with the highest interest rate first descending to the lowest. During this process you want to also identify the minimum monthly payment required for each account. Lastly, you need to determine how much above the minimum payments you can afford on a monthly basis. We’ll call this monthly amount the “debt eliminator.” (We'll come back to that in Step 4!)
Step 3: Analyze. Now that you have everything listed, you are able to determine if there are opportunities or alternatives to paying off the higher interest rate accounts. For example, I have a client that had about $27,000 in consumer debt that included credit cards, student loans, and a few personal loans. He has a decent credit score and a long banking relationship with a local credit union. After realizing that his interest rate on his credit card was 28.99%, we decided to apply and transfer the balance to a personal loan offered at the credit union which now was going to reduce his interest rate to 9.99%. We did this process with each account and was able get $15,000 of his debt restructured in a better loan.
Step 4: Implement. The next step is to apply a debt payoff strategy known as the debt snowball method. You can do an internet search for "debt snowball" and find lots of articles and calculators, but here’s a brief overview: First, pay the minimum on all your debts except for the one with the highest interest rate. Second, take your “debt eliminator” mentioned above in Step 2 and apply that to the minimum payment of the highest interest debt. Then, once that debt is paid off, apply the amount allotted to the last “debt eliminator” to the next account. Every time a debt is paid off, add the sum of the previous allocations to the new “debt eliminator,” hence the snowball effect, until you are debt free. I recommend automating this process as much as possible.
Some of the most popular strategies include the following:
Prioritizing debt by interest rate. This repayment strategy, sometimes called the avalanche method, prioritizes your debts from the highest interest rate to the lowest. ...
Debt consolidation allows you to combine several high interest debts into one new loan, ideally with a lower interest rate. This new loan is then used to pay off all your debts, and you only have to make one monthly payment. Many debt consolidation lenders offer to pay your creditors directly.
Key Takeaways. The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
Unfortunately, there is no such thing as a government-sponsored program for credit card debt relief. In fact, if you receive a solicitation that touts a government program to get you out of debt, you may want to think twice about working with that company.
While there are no government debt relief grants, there is free money to pay other bills, which should lead to paying off debt because it frees up funds. The biggest grant the government offers may be housing vouchers for those who qualify. The local housing authority pays the landlord directly.
Instead of paying a company to talk to creditors on your behalf, you can try to settle your debt yourself. If your debts are overdue the creditor may be willing to negotiate with you. They might even agree to accept less than what you owe.
Paying off debt requires constant sacrifice. It's hard to do since we're continually flooded with advertisem*nts for goods and services we don't need. As long as you're paying off debt, you have to say “no” to things—vacation, electronics, and jewelry—that will hinder your debt repayment progress.
To pay off $30,000 in credit card debt within 36 months, you will need to pay $1,087 per month, assuming an APR of 18%. You would incur $9,116 in interest charges during that time, but you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.
Introduction: My name is Merrill Bechtelar CPA, I am a clean, agreeable, glorious, magnificent, witty, enchanting, comfortable person who loves writing and wants to share my knowledge and understanding with you.
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