One of the major reasons people cannot achieve greater financial freedom is that they have excessive amounts of short-term debt. This debt is incurred from credit cards, student loans, car payments, and personal loans, among other things. This guide presents several ways to get a better grip on debt that has gotten out of control.
• Get interest rate reductions: Ask every creditor to whom you have paid your bill in a timely fashion to reduce your interest rate. If a few of them agree to do so, you will be able to pay off the balances on those loans and cards sooner. You may also have more money to apply to paying off other accounts with the money you save from your lower interest rates.
• If you get the interest rate on one or more of your credit cards reduced, transfer balances from credit cards with higher interest rates to the card(s) with the lower rate. Check to see if the card(s) with lower rates has any balance transfer fees associated with it. If so, is the spread between the cards with higher rates and the one(s) with lower rates still better when you factor in the transfer fees? If the difference favors doing the transfer, get it done.
• Get a consolidation loan: If your credit is above average and none of your creditors are willing to reduce your interest rates, consider getting a consolidation loan. These loans often have rates that are significantly lower than credit card rates and often cost less than paying each creditor separately would. Note, however, that your particular situation may require collateral, such as your home, to secure a consolidation loan. Not all lenders require collateral. So, it pays to shop around if you think your credit and financial picture are good enough to earn the loan without collateral.
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• Tighten up your spending: Take lunch to work instead of eating out each day. Cut your cappuccino splurges back from five days a week to three days to zero. How many channels do you really need? Reduce your cable TV package. Use the money you save to pay down your debts. Your flourishing financial freedom will love you for it.
• This next one might seem to be out in left field, but it really will work. Do you have a qualified retirement plan? Does your employer offer a matching contribution? Do you contribute more to your account than the amount your employer matches? Then, it may be time to suspend contributing above the match for a moment. While retirement plans are great ways to accumulate, they are horrible for distribution. If your employer will only match your contributions up to three percent of your salary, then, do not contribute more than three percent of your salary.
Use the extra cash to pay down your short-term debt. Here’s why: You will likely never see gains in your retirement account that will come close to what you are paying in interest on your short-term debt, especially if much of it is on credit cards.
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Let’s take a closer look. Let’s say your investment portfolio averages a solid 11 percent gain year in, year out. That would be an exceptional situation, but let’s say it happens. Let’s also say that your average credit card rate is 13.99 percent. By using whatever extra money you are socking away in your retirement account to pay down your credit card debt, you are essentially paying yourself an extra 2.99 percent annually on that debt. So, pay down it down. Then, if you want to restore your retirement contributions to their original levels, feel free. There may be better places to invest that extra cash, but that’s for a later discussion. You will have done a great job just freeing yourself from those short-term debt handcuffs!
Excessive short-term debt can become a serious financial burden if left unchecked. Finding a place to start dealing with it can be difficult in the midst of everyday life. There are more ways to reduce debt than are examined in this article, but using any of the ones listed is a step in the right direction- toward greater financial freedom.
Evan Blackmon, M.Ed., Financial Advisor and Registered Representative
First Financial Group
1869 Charter Lane, Suite 201
Lancaster, PA 17601
Phone: 717.393.4465
Website: www.financialadvisorlancasterpa.com
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 670 North River Street, Suite 300, Plains, PA 18705. 580-829-0717 Securities products and advisory services offered through PAS, member FINRA, SIPC. First Financial Group is not an affiliate or subsidiary of PAS. Agent of First Financial Group an agency of The Guardian Life Insurance Company of America, New York, NY 10004. GEAR 2014-16283 Exp 12/2016.
