Managing Debt: A Thoughtful, Comprehensive Approach
Debt sometimes is treated like a bad word. When managed correctly, the right kind of debt can be a useful financial tool. Paying off debt in a timely manner and not letting it get out of hand is certainly important. But managing debt is still just one part of your bigger financial picture.
Sometimes people accumulate more debt than they would like, and it’s necessary to take extra steps to manage it. By working with a banking partner who approaches finances holistically, you can benefit from your advisor’s experience and perspective to learn about managing debt responsibly.
Start by defining your goals and monthly budget
It may be tempting to throw all the money you can at debt, but if you dig too deep, you may not have funds for regular monthly expenses – which can lead back to debt. Start by identifying your goals – do you want to pay debt off quickly, simplify your life by having fewer debts, minimize interest accrual, etc.? Next, create a realistic budget for all your expenses to accurately show how much money you truly have available to put towards debt after paying for monthly living expenses, like mortgage, retirement savings, and the rest.
Consider how debt fits into your whole financial picture
With a budget and goals in mind, it’s possible to start strategizing how to manage your debt. Perhaps you use debt predictably from month to month and can set aside a certain amount to pay it down. If you have a larger debt you want to reduce, look for balanced ways to accommodate the added payment – the long-term cost of reducing retirement savings, for example, might be a poor trade-off. Having emergency savings helps reduce dependence on debt in a pinch, so that should also be a priority.
Explore debt consolidation – but know it’s not always the answer
The first thing many people think of when talking debt management is a debt consolidation loan. This tool can be a useful option, but it isn’t magic. When they work, consolidation loans can reduce total monthly payments and simplify budgeting. But they may include terms that can catch borrowers off guard and may not actually reduce total interest paid, especially if your current debt is low interest.
Pay attention to the psychology of debt and turn it to your advantage
Debt can affect a person’s mindset. Access to easy money might make a person spend more than they can afford and can lead to feelings of guilt or even depression. It’s important to recognize that getting debt under control is about more than just dollars and cents. For some people, visible progress is highly motivating, so paying down the smallest debt first may provide a quick win and lead to more. For others, it’s about accountability, having a partner who can review progress and give positive feedback. Whatever helps you deal with debt more effectively, find ways to incorporate that into your life.
Work with a partner to resolve the underlying causes of debt
For people who may be challenged by debt, an outside partner can be a great resource to help you assess your current financial picture and what might be out of alignment to your goals – often excessive debt is the symptom, not the problem. Debt may be a sign that too much money is going to other things, or a sign that a person lacks an emergency savings, or that living expenses have increased but your budget doesn’t reflect that. Getting to the root of the problem allows you to prevent debt from piling up again once you have it managed.
Whatever your debt situation, a financial advisor can help you manage it. They have experience and can offer tools and solutions you might not think of on your own. Talk to an Alerus advisor today and take the first step towards a healthier relationship with debt.