#DollarWise : How to Handle Your Debt

Friday, February 15, 2019

Couple of week's back we kicked off this series in hopes that by having open and honest conversations about finances, all of us will be able to get to that better financial space. Having a budget is create and is the first set, so if you did that, we move onto debt and credit. A reality for most us is that we have some kind of debt obligation. Whether it's our mortgages, car payments or balances on credit cards chances are many of us have debt, and in reality we need it.

I couldn’t afford my house if it wasn’t for a mortgage – so debt is a necessary evil – but not all credit is good debt. Credit cards and lines of credits are mean to be used for emergency and paid off ASAP because interest over time can cost you a pretty penny.
I might be off base but reducing debt and using credit wisely and sparingly is what we are all hoping to achieve and for this we need a plan. There are TON of different opinions of what order you should pay your debt off in – some research states that you should aim to repay the debt with the highest interest rates first because it will save you the most money in interest. Others suggest that you should be starting from the smallest to largest outstanding balances, and start repaying the smallest balances first and working your way up. That way, you will see progress sooner because small "wins" empower and motivate us to keep going.
One of the main reason we started this segment with a budget is so you know how much money you can commit to debt repayment. It's great that you want to get rid of your debt but you need to know what exactly you can afford to put towards debt without getting into further debt to do it.
If you are able to go to your credit union or financial institution to get a consolidation loan to pay off al debt by rolling into one payment, that will be your best play. This way you save money on interest, and there is an end date when your debt will fully be paid off. If you are consolidating all your debt (especially revolving items like credit cards and lines of credit), make sure to close those so you are not using them. There is no point of consolidating if you are just going to go back and rack up debt.
If debt consolidation loan is not an option consider lowering your interest rate on your outstanding balances by transferring balances from high interest credit cards to lower interest rate or promotional rate credit cards or line of credit.  Most credit cards have intro balance transfer rates where for 10 month or a year you get to pay very low interest rate allowing you to pay off your debt faster.
If nether above are option, or you want to do multiple solutions to maximize your debt repayment strategy, I have included a debt stacking calculator – this spreadsheet is a tool for you to prioritize and come up with a plan in what order you need to pay off your debt.
I cannot even remember where I got this but I have been using at work for years – its super simple to use and the second tab gives you a payment schedule.
You fill you the top portion with today's date, and then list all the debt you have, outstanding amount, rate and payment/minimum payment required. (I personally don't include my mortgage in this, but if that's one of your goals, power to you. )Than in the monthly payment you add the amount you are comfortable making towards your debt re-payment (from your budget).
In the strategy drop down box you have bunch of options, and the side of the spreadsheet has descriptions, I would recommend selecting a strategy that saves you the most money by choosing the option with the lowest total interest paid amount. Page two covers what you payment schedule will look like. (you do have to print it because  I don’t know how to get rid of that "bubble" without printing it)

No matter which approach you use or trying combination of all above mentioned and committing to a debt reduction plan will improve your financial health and how you feel. Finances can be a heavy burden but I'm hoping that these tips and resources are helping.