Paying Down Debt Is The First Step to Any Good Financial Life Plan
When forming a life plan, there are plenty of things to take into consideration and learn about from how you’re going to use this week’s paycheck all the way up to what will happen to future property you might own in the event of a divorce or your death. Compounding investments – both medium and long term – form the backbone of most sensible goals. Whether you want to set aside funds to buy a home or pay for law school, making early and smart investments is the best way to make it possible.
But before you make investments, the first goal in any life plan must be taking control of your debt. Whether it’s credit card debt, student loan debt, or other miscellaneous debts, owing vast sums of money hampers any financial life plan.
The first step to getting out from underneath the crushing weight of debt is to stop adding additional debt. This means cutting up those credit cards. It also means making sure you build an emergency fund. Start saving 10%-20% of your income for unknown forces such as car troubles, medical costs, and unexpected child costs. Emergency funds can help you not have to borrow money for minor life expenses.
“Without something set aside for emergencies, every unexpected thing becomes an emergency where a credit card or other debt is the only option. That’s how many people get overwhelmed in the first place,” says NerdWallet. “Is $500 enough? Yes, if it provides enough breathing room for your debt-payoff strategy to work. And you will sleep better knowing you have something — anything — tucked away.”
The faster you stop compounding your debt the faster you can start to reduce it.
The next step is to map out your debt and figure out what needs to be paid off first. Debt comes in many shapes and sizes – from consumer debt, to student loan debt, to auto loan, mortgage, and medical debt. Usually you want to tackle consumer (credit card) debt first, as the interest rates are often higher and are not normally fixed.
“Paying off your highest-rate card first makes sense because it saves you the most money, but if you have several smaller cards, it can be easier psychologically to get those out of the way first,” JimTehan, of self-help consumer education website Myvesta Foundation, tells Bankrate. “It’s important to keep sending the maximum amount you can afford to send. Some people make the mistake of reducing the amount they send when they see their payments going down.”
How do you tackle debt that seems insurmountable? First, calculate your debt. Use a debt calculator to see how long it will take you at what payment rate to pay it off. Use an online tool like this one at TheSimpleDollar.com to figure out how increasing or decreasing payments affects your debt level over time. Take the time to research your options, like debt consolidation, debt management, or debt settlement. Depending on your level of debt, there may be ways to lessen the burden.
Set a budget. No matter what debt strategy you choose, it should involve proper budgeting and savings. The good thing about budgeting is no special tools or experience is required – just organization and commitment. It’s best to ask yourself where should my money go? If debt is a problem, then the answer to that is pretty clear.
Because of the principle of compound earnings, it’s tempting to use any extra money you have to start an investment, such as buying a condo or house, for example. But in the long run it’s better to use those funds to set up an emergency fund and then pay down your debts. Any solid financial life plan starts with un-encumbering yourself from the chains of excessive debt.