Debt is a fact of life for most people. Whether it's a student loan, mortgage, car payment or a way to fund your dream, most people have some type of debt in their monthly budget. Even if you have more than you'd prefer to take on right now, it's still possible to manage that debt and achieve your long-term financial goals.
Like many things, debt can be useful in moderation and harmful in excess. The right kind of debt gives you the leverage you need to buy a house, invest in an education that can increase your earnings, or even grow a business. On the other hand, taking on too much debt can jeopardize those goals. Here are some strategies for striking the right balance in managing debt while pursuing your plan for long-term financial security:
- Set Goals from the Start
Identifying what you are striving for will help you stay motivated through the challenges of sticking to your financial plan. Write down your goals and review them with a financial representative as part of developing your financial plan. Review them regularly and consider revising them at least once a year to stay current.
- Stick to a Realistic Budget
Calculate your monthly income and decide how you are going to use it to meet your goals. You may want to consider the common budgeting approach known as 50/30/20. This suggests allowing about 50 percent of your budget for essential expenses, such as housing, food and transportation, and allocating about 20 percent of your income to financial priorities such as debt payments, an emergency fund, and personal and retirement savings. That leaves 30 percent of your budget for lifestyle expenses, including phone, internet, entertainment, restaurants and shopping. Track your expenditures, and make tough decisions where necessary to reduce expenses. Technology can help you stay on top of things with budget management software and apps for cell phones and tablets that track expenses and check account balances.
- Take Advantage of Employee Benefit and Retirement Plans
Employer-sponsored benefits such as life insurance, disability income insurance and health insurance can improve your financial position. If your employer offers to match a percentage of your retirement savings contributions, prioritize your budget so you can set aside enough to obtain the maximum employer match.
- Take the Right Steps with Student Loans
If you have student loans or are guiding a recent graduate in financial matters, choose a repayment option that will be manageable even within a limited budget. You can always make higher payments when your income allows (and the additional funds will be applied to the loan principal to reduce your debt faster). Always pay on time – arranging automatic payments makes it easy. If you have multiple loans and want to simplify, you might consider loan consolidation or researching a better rate, but study each option carefully and be aware of all the pros and cons.
- Understand Debt Before You Agree to It
Be very clear on the potential costs and implications of any debt before you take it on, especially with loans or credit cards. Read the fine print to be sure you understand what could happen over time, including interest rate fluctuations and early or late-payment penalties. Beware of tempting offers that may promise easy money but are accompanied by high fees, escalating interest and severe penalties.
- Have an Exit Strategy
If you have debt to manage, know your repayment options and set a payoff deadline for yourself. Pay consistently and on time to build a good credit rating and avoid penalties. Focus first on high-interest debts, such as credit card bills, and when they are paid attack the next high-interest obligation until things are under control. Going forward, commit to paying every balance in full each month and living within or below your means. If necessary, cut up credit cards and operate with cash and debit cards for a while to limit expenses.
- Watch Your Debt to Income Ratio
When you want to buy a house or obtain a loan, the lender examines the balance between your debt and overall income to decide whether to approve it. A common financial planning guideline is to keep your debt at or below 36 percent of monthly income – including payments for housing, credit cards, and car and other loan obligations.
- Recognize When Debt Means Leverage
Depending on your life stage and earning capacity, there may be times when you’ll want to consider taking on appropriate debt for financial advantage. For example, you may want to purchase or expand a business, or buy a home or investment real estate. If you own a permanent life insurance policy, you can use the cash value from a policy loan to pursue an important goal. As with any debt, have a plan to repay the policy loan before taking on the obligation.
It is possible to balance debt and move forward on your journey to financial security when you establish a habit of savings and a well-thought-out financial plan. A financial representative can help you design a plan and implement strategies to meet your particular needs.