Americans are set to reach $4 trillion in consumer debt this year. That shocking number might encourage you to get a better understanding of your unique debt situation, even if you have met with financial experts in the past.
It seems counterintuitive but thinking about debt is an important part of growing your wealth. In times of economic prosperity, debt can function as an investment. On the other hand, you can run the risk of default during a recession. It’s best to be prepared for both circumstances and to consider that unexpected, emergency healthcare costs are the number one reason that Americans file for bankruptcy.
Taking a good look at your debt and forming a plan can save you in the long run. There are moves you can make now to improve your standing and avoid paying higher interest rates soon. Read on to find a strategy that might work for you.
Distinguishing Your Debt
First, let’s stick with the topic of consumer debt. It’s categorized as either revolving or non-revolving. Revolving debt is meant to be paid off each month, and it usually refers to credit card debt; however, many Americans tend to treat credit cards as a personal loan. The average household carries a balance of $7,000 with interest compounding each month.
On the other hand, non-revolving debt includes fixed-payment loans for automobile purchases, education, homeownership, and business development. This is sometimes called “good debt” for good reason. These are personal investments that can help grow your wealth, so they can be evaluated differently.
In general, most people can benefit from following a 50/20/30 budget guideline, which suggests 50 percent of income goes toward debt, 20 percent toward financial goals like emergency funds or retirement, and 30 percent toward discretionary spending. However, if you have more complicated finances, you may want to speak with an expert to develop a more refined strategy.
Planning for the Long Term
What steps can you take now? You might want to think about refinancing since the Federal Reserve plans to raise interest rates several more times in the coming year. That move can save hundreds or thousands of dollars. Next, it’s worth moving high interest credit card debt to a personal loan, even if you feel the payments are manageable. You might be able to reduce your rate by more than 10 percentage points.
You may also want to refinance student loans to a fixed rate before the increases take effect. Lastly, consider any debt related tax breaks; you don’t want to lose those deductions by paying off something like a mortgage or student loans before other types of debt. As always, be sure to talk with your financial advisor before changing your approach.
Our team at Naden/Lean can customize a plan for you. We can suggest new ways to manage your debt and maximize your prospects. Your financial goals are our priority. Contact us for more information.