The Importance of Getting Out of Debt and Staying Out of Debt

Is there a shadow of debt casting a dark cloud over your finances and retirement plans? Read our tips on how to brighten your future.

Financial debt is a fact of life. How you manage your debt and spending habits today is what will define your future, including your retirement planning objectives.
 
Many people find it incredibly difficult to save money and plan for retirement. That’s not uncommon. Being mired in debt only complicates matters. How you define your retirement and financial future is dependent upon the decisions you make today. In many ways, the difference between managing debt effectively and saving money comes down to being frugal and happy with the quality of living you have today. By doing so, you can secure the quality of living you want to have in the future.
 
To put it another way, if you’re a spendthrift who relies heavily on credit cards and a line of credit to fund your purchases, you’re essentially mortgaging your future. That’s one of the major problems with being deep in credit card or line of credit debt.
 
Similar to managing an investment portfolio, you need a thoughtful, flexible strategy for managing your debt and consumption habits. No doubt you’ve heard people talk about diversifying or rebalancing their investment portfolios; look at debt in the same way. Debt, like investments, is also a portfolio that you can manage more efficiently. Unlike investments where you’re seeking the highest possible returns, for debt you want to manage it effectively so you achieve the lowest cost of borrowing.

Good Debt, Bad Debt

Is there such a thing as “good versus bad debt”? Yes. Good debt is an investment in something that will generate returns or long-term income such as property. Bad debt is credit card or consumer spending debt where you don’t have anything to show for the spending other than maybe some good life experiences.
 
Basic economics theory suggests you can do one of three things to effectively reduce your debt: you can make more money, spend less money, or a combination of the two.

Five Ways to Manage Your Debt Effectively

Are you worried about the amount of debt you have? That’s a good sign. It means you’re ready to do something about it.
 
Getting out and staying out of debt should be every individual’s goal, but how can you do that and still have the things in life you want while saving for retirement? Consider these ideas to help you tackle your debt:
 

• Track and change your spending habits. It may be one of the most difficult things you do, but once you get into a routine, it becomes easier. Whether by pen and paper or using a mobile app, keep a spending journal for at least three or four weeks. Include everything you spend money on, not just random purchases. Include your monthly bills and the amount you’re committing to each one. When you do purchase goods, only buy what you need, and if you can, buy it in bulk. Take advantage of coupons and rebates on your purchases, and consider buying no-name product alternatives to goods made by more popular, expensive name brand products.

 

• Get into cash-flow planning. Now that you’re keeping a spending journal and you have a better idea of what you’re spending your funds on, cash-flow planning is the next step. It’s a forward-looking strategy for planning to use only cash to buy most things you need. If you own a home or property, you have equity, and there are many ways to pay down debt by financing it through those assets.

 

• Refinance your debt to a lower rate. If you have a good credit score and rating, you can use it to your advantage. For instance, if you’ve been diligent making payments on your credit card, and haven’t missed any monthly payments for more than one year, contact your credit card company and ask if they’ll lower the interest on your card. Alternatively, you might be able to secure a personal loan at a rate that’s lower than your credit card from your bank or an online lender.

 

• Increase your income. Depending on what it is you do for a living, and if you have the personal bandwidth, increase the amount of money you make each month by taking on additional freelance projects outside of your primary employer. Or get a second part-time job on the weekends to help up your income.

 

• Trim your expenses. Leveraging the data from your spending journal, analyze where you can reduce your expenses. For instance, can you live without cable TV and forgo annual vacations? Avoid eating out and bring a lunch from home to work. If you take public transit, purchase a monthly transit pass instead of paying cash at the fare box each day. Use your bank card instead of a credit card to pay for goods. Can you switch to a bank account that doesn’t charge you annual fees? Wherever you can find savings, even if it’s only $50 each month, it’s a step in the right direction.

 
Everyone faces a unique situation when it comes to debt, but understand that you’re not alone in that struggle, and there’s no reason to feel ashamed about being in debt. Above all, know you always have options to help you seize control of your debt portfolio, and in turn, make retirement planning a reality.
 
Do you have questions about or are seeking assistance on how to reduce your debt? Talk to one of our professional, certified financial and investment advisors. We have the experience and expertise to help. Call us toll-free at 1-800-595-2150.