Controlling Your Debt

A new year always suggests the opportunities to create the world we truly wish to live in and the strategies we must implement to achieve success. Too many of us write down meaningless resolutions on January 1 that have no measurable qualities to denote actual commitment from the writer. This year will be different for you. As Jim Rohn often said, “We all face the same environmental disturbances and life challenges. We can either let the wind blow us where it goes, or we can reset our sail to go in the direction we desire.”

After Christmas, the reality of the expenditures we made comes to our attention. Credit cards that were used to make purchases are now due. Our economy is subjected to the highest inflation we have experienced in 40 years. You will note the impact of this inflation in your gasoline, food, clothing, medical and other items you purchase for everyday living. To counter the increasing inflation impact, the Federal Reserve Board of Governors continues to raise the rate it loans monies to participating banks. This process creates an impact on the economy to discourage the use of credit which will slow the demand of cash in the country.

One of the most noticeable areas of your life in which the Fed’s interest rate raises appear is your credit card bill. When opening your card statement, you will notice the increased interest rate for any balances not paid in full by the due date of the statement. Compare the interest rate from a year earlier to the one you received this month. Most likely the rate will have increased significantly.

The key habit to build into your lifestyle is to pay the monthly balance owed on your card in full each month. Two benefits will result from this habit. First, you will notice your credit score may rise due to the excellent payment record and management of your credit line. Second, you will maintain better control of your monthly budget since you will need the cash to pay off your card balance each month. 

One group of professionals that track credit card usage is the American Bankers Association. According to the data collected by the association, 40% of all Americans utilized a credit card and maintained a balance on the account at some date within the second quarter of 2022. Experian, one of the major credit monitoring agencies in the United States, reported that the average balance, reported by credit card issuers, owed by Americans in the third quarter of 2022 was approximately $6,004. In most instances, the reasons for using a credit card are to bridge cash flow needs during the month. However, it is highly recommended that credit cards are not used for purposes of increasing one’s lifestyle.

To control your life, you must take command of the variables that impact you. Your credit should be reviewed annually and loans with the highest interest rate should be liquidated first. Continue this process until all debt is paid in full. 

A funny, but true, story that happened to me last summer related to the purchase of an automobile for our daughter. Based on our excellent credit score, our family has not paid interest on a vehicle in more than 20 years. Knowing that our credit score was higher this year than the last vehicle we purchased, I confidently walked into the dealership in her city and introduced myself. Our daughter had researched the type of vehicle she wanted, and the dealership possessed a similar one in its inventory.

We informed the salesman of the amenities she desired on the vehicle and was informed one that she wanted was being shipped to the dealership within a couple of weeks. Remember, this is still a supply chain issue in the U.S., and I informed my daughter to give them a month before expecting delivery. We negotiated the price; I shook hands with the salesman and ask him to write the purchase contract. What happened next completely caught me by surprise!

I had researched the financing options with the manufacturer and noted that there were no zero-interest financing available due to the economy and the demand for vehicles. To counter this economic impact, we were going to write a check for the automobile. As I began to write the check, the salesman noted that I was writing it for the total agreed sales price. He said, “you can’t write a check for the sales price, or we will have to raise the price $1,000.”

Imagine the shock on my face that we would be charged an additional amount for paying the car in full instead of financing the vehicle! I understood what the gentleman was explaining and thought that the dealership would be grateful to work with someone who has such stellar credit and pays up front for their vehicles. Alas, these are different times. 

The moral of this story is “cash isn’t always king” and “supply and demand” play a heavy role in the operations of businesses. 

Review your current debt and find a means of paying off the largest interest rate loans. If your credit card is carrying a balance, I would recommend you start by paying the largest amounts available on the balance. To assist you with your family’s cash flow planning and other future needs, consult your local Certified Financial Planner™ professional. Hope you enjoy a successful and prosperous New Year!

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The Millennial Perspective: Climbing Everest

Do you ever feel like the weight of the world is on your shoulders? Do you wonder how much of that weight may be lifted without the stress of growing debt? Me too! I’ve always said, “We live in America so we will always carry debt. That’s just the way it is.” But should it be? It doesn’t feel like the mindset I or anyone should have when looking at our lives. A vast majority of our country has some sort of debt. With all of the factors of life that affect Millennials differently than other generations, this can feel especially defeating.

If you combine the average student loan debt, credit card debt, mortgage debt, and car loan debt among millennials you’re looking at about $285,000 total. That’s a big, and kind of scary number. This isn’t to say that every millennial has debt in each of these categories. So, let’s break that number down. On average, millennials have about $30,000 in student loan debt, $5,000 of credit card debt, $232,000 in mortgage debt, and $18,000 of car loan debt. 

Let’s imagine you have debt in each of these categories. If you had a car loan with a balance of $2,000 with a low interest rate, the average amount of student loans, a credit card balance of $7,000 with a high interest rate, and you just bought a new home. Which of these debts would you want to pay down the fastest? Your first thought may be to pay the credit card off first because it has the highest interest. However, let’s imagine you have enough in your bank account to pay off your car immediately. Even though it has a lower interest rate, you are most likely paying more each month on your car payment versus your credit card payment. One of the best ways to handle this situation is to pay off the car and rather than adding the additional money you now have each month to your cash flow, stick to your budget and stack the extra funds on top of what you are already paying on your credit cards. Now you have eliminated one debt and you will be paying more on your principal balance of your credit cards and will be able to eliminate that debt much faster than you would have originally.

If you can continue to stack your debt, AKA snowball your debt, then you may find that a mountain that once felt like an endless Mount Everest now feels more manageable. Setting a plan to help you start that exhibition and properly manage your money is the key to success. There’s no need to change your entire budget and live off Ramen until your debts are paid. This is just one of the philosophies when it comes to paying off debt. Several others exist, but the important thing is to pick a plan and go. 

Living slightly below your means is a good way to pay off debts, but living very far below your means just because of debt may tarnish your quality of life and your relationship with money. Money is a means to an end, not the end all, be all. It is always wise to seek the advice of professionals, such as a CERTIFIED FINANCIAL PLANNER™ to help you create a plan that works for you and ensures you maintain your quality of life. You don’t have to be uncomfortable to be comfortable. 

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