Managing Debt

Debt can be a difficult thing to carry around, and if left ignored, it can be a hindrance to your financial planning efforts. And while there are many different strategies for lowering and managing debt, it really all comes down to one word: Balance.

Remember, your financial situation is unique, and you need to find a way out of debt that will be realistic and work with your lifestyle. And yes, you will likely have to make some sacrifices along the way, but finding this balance as you approach your debt will instill financial behaviors that you will able to carry with you for the rest of your life.

Identify your debts

In order to manage your debt, you must first separate the good from the bad. What does this mean? While no debt feels “good,” there are some types of debt that further your lifestyle, help you reach your goals, or even improve your financial situation. Those types of debt are things like a mortgage, or a student loan.

These types of debt are actually improving your lifestyle by helping you purchase big-ticket items, which will ultimately improve your net worth. However, to be clear, these debts still need to be managed in order to be beneficial.

On the other hand, there is revolving debt, such as that debt you put on a credit card. Or you might be saddled with past-due medical bills that were not taken care of. These types of debt are considered bad because they can accrue easily and they might have higher interest rates tacked on to them.

Lump the sum of that bad debt together, and make this your first plan of attack. This will come down to reworking your budget. Make sure you are still keeping up with your current payments on that good debt as well. This is how the balance works.

You also don’t want to lose sight of savings goals, such as your emergency fund. If you have to cut back some areas of your lifestyle temporarily, then do so. Getting your debt under control should be worked into your top priorities.

Common methods

Remember, you need to pay down debt in the way that makes the most sense for you. However, there are some common methods that have gained popularity over the years as they have proven to be effective.

• Snowball method: This is the process of paying down the smallest debt first, and then building momentum to tackle the rest. This doesn’t mean you should stop making payments on the other debts. Make at least the minimum payment on all your debts, but as one is paid off, then start paying more on the others, until you’re eliminating them one by one.
• High-interest paydown: As you’ve likely noticed, some of your debts come with more interest than others. Some consumers have found it beneficial to pay down the debts with the highest interest rates first. Similar to the snowball method, you still want to make payments on all your debts, but with a focus on eliminating those high interest amount first.
• Consolidating debt: If you have a difficult time juggling your various forms of debt, there is an option to consolidate your debt. This means that you will bring all of your debts together, and essentially take out a new loan for that amount. Your financial provider will work with you to establish an interest rate and schedule that is appropriate for you based on your financial standing. This still means you will owe the same amount, but it will be consolidated into a single monthly payment balance. Sometimes this can make it easier for people to manage their overall finances and keep better track of their debt.

Rely on tools

There are many online and mobile tools that will help you in your efforts to manage your debt. From setting up alerts on your phone to notify you of balances or due dates, to simply setting up automated bill payments so you never worry about missing a bill payment.

Once you have your plan in place, activate these tools so your debt repayment plan doesn’t always have to be top-of-mind. These tools are reliable, and can make your efforts much easier and much more efficient.

Stick to the plan

There is no right or wrong method for paying down your debt, as long as you are making regular timely payments and getting it under control. And it is important to note that debt in and of itself is not a bad thing, it just has to be part of your budget and financial plan.

Managing your debt will make it so that you are in control of your finances, and if you continue to keep your debt low and your payments on time, you will grow your credit score as well, which will help you avoid high interest from being tacked onto your loans in the future.

Managing debt is not a skill you learn overnight, but one that takes much time and sticking to the right financial behaviors. Take control of your debt today.

Want help getting started? Schedule an appointment to meet with someone at an Associated Bank near you.

 

Sources:

“How to Manage Debt of Any Size,” the balance, July 2020

https://www.thebalance.com/how-to-manage-your-debt-960856

“Managing debt,” consumer.gov

https://www.consumer.gov/debt

“How to Consolidate Your Debt,” credit.com, July 2018

https://www.credit.com/blog/how-to-consolidate-your-debt-67335/