Managing your debt


The amount and type of debt a person has accumulated is directly linked to that person’s current financial wellbeing. Too much debt can be financially debilitating and not using debt can keep a person from moving forward. Fortunately, managing debt wisely isn’t difficult and it can change your financial outlook.

Where do most people go wrong in managing debt?
Not understanding that there is good debt and there is bad debt. Good debt would be borrowing to purchase an appreciating asset like a home or to purchase something required for life, perhaps a car. Bad debt is when you fund poor financial decisions such as overspending on the holidays or other extravagances that don’t add value or help you lead a better life.

Are there other mistakes that are common in managing debt?
One of the biggest mistakes is not making an effort to payoff high interest debt as quickly as possible. Not only credit cards, but other types of loans with high rates should be a priority to quickly reduce to avoid paying a large amount of interest. Failing to do this could cause one to pay the balance 2 or 3 times over.

How much debt is reasonable for a person to have, excluding homes and cars?
A good rule of thumb is to keep credit card, student loan and other debt payments to 10% or less of your monthly take home pay. It is important that if you have credit card debt, don’t use the minimum payment amount but rather a monthly payment that would pay the credit card off in 36 months or less. Focusing maximum debt on your income is the best way to know how much debt you can really handle.

Are there any warning signs that we might have overextended on debt?
The first is not knowing how much debt you have accumulated. As the issue gets worse more alarming warning signs include paying less than the minimum payment amount, paying over 30 days late or even using cash advances to make payments. All of these are signs that you have overextended on debt.

What are tips on managing debt wisely?
Add debt based on your income, specifically determining if you can make the monthly payment without impacting other areas of spending. If you already have debt that needs to be managed, look to consolidate several debts into one loan or refinance to lower your interest rate. Both of these should help to make paying your loans easier and save you money.

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