By Andrew Hatherley on Oct 15, 2019
The one aspect of personal finance that most Americans share in common is debt accumulation. Average household credit card debt exceeds $7,000. But then, controlling debt becomes a truly subjective issue. Some people might think that having a few hundred dollars of debt is a major problem while others are can barely survive under the weight of their out-of-control debt. In either case, controlling and reducing debt is a concern which requires a deliberate strategy if it is to be achieved. Even if debt is not an overriding concern of yours, reducing its costs can be the quickest way to improving your cash flow so you can commit more to savings.
Taking Measure of your Debt
In this day of double digit interest charges, having zero debt is the best strategy, but that isn’t always possible for many business owners. If you have to carry debt, it is important to at least keep it at a level that can be safely maintained by your ability to pay it. Your income dictates how much debt you can carry and still pay all of your other expenses, and still have some money left over for savings.
Your debt to income ratio is a key determinant for lending institutions when they consider your request for a loan or credit card. Most lenders require that a debt ratio not exceed 36%. That is your debt expense should comprise no more than 36% of your income. Keeping your ratio below this is a start for controlling your debt. Setting a goal to reduce your ratio by 2% each month, could have you out of debt within 18 months.
Payoff Low Balances First
This may seem to be counterintuitive if you’re concerned about the balances on your higher interest debt, but, by eliminating the more manageable balances first, you can free up those payments that can then be applied to your more expensive debt. This will have the effect of accelerating the debt reduction of those high interest accounts.
Lower your Interest Expense
With the average interest rate on credit card debt approaching 20%, it can only make sense to transfer that debt to a lower interest card when you can. This strategy can work effectively if you apply it responsibly. While the transfer will result in a lower debt payment, you should continue to pay the same amount each month as you were on the higher interest account. The objective should be to accelerate your debt reduction.
Don’t Add New Debt
While it may be stating the obvious, it’s always worth repeating, especially for those who feel compelled to spend beyond their income each month. This is why budget planning is so important. It enforces the discipline that some people lack in order to keep them living within their means.
Credit cards can be an effective cash management tool, if used responsibly. When used to pay normal and budgeted monthly expenditures, they can actually help you control and track your expenses. The danger with them is the ease in which impulse purchases can be made with the rationale that you can make up for the extra expense next month. The better approach is to switch to using debit cards and keep one credit card on hand to use for emergencies.
*This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2023 Advisor Websites.