Financial Planning and Debt

Financial Planning and Debt

The majority of consumers carry some sort of debt: mortgages, student loans, car financing, credit cards, and personal loans, which are the most common. Debt management is an essential part of financial planning; identifying what types of debt could be holding you back is a vital step in your efforts.

Why is financial planning important?

Financial planning is creating a roadmap to your goals. What do you want your money to accomplish and how do you prioritize the money you earn? Creating a financial plan can be a simple process you do on your own or more elaborate with a financial advisor. Whether your goal is to put down roots or travel or fund an education, financial planning is your guide to making it happen.

Building a simple plan

1) Take a comprehensive look at your current finances. Track your cash flow and monitor money in versus money out.

2) Protect your financial well-being. This means building an emergency fund that can keep you from having to run up debt.

3) Figure out your debt-to-income ratio. Bankrate offers a simple online calculator that can help — just enter your recurring monthly debt total and gross monthly income.*

4) Manage high-interest debts. If you have multiple outstanding balances with high-interest rates, you could save potentially thousands of dollars with a lower-rate debt consolidation loan.

5) Cut unnecessary spending. You will get where you want to be faster if you can trim excess spending and keep your goals top of your mind.

6) Pay yourself first. Allocate percentages of your income to your future. Build savings, retirement and consider investment possibilities.

Understanding your debt

Debt typically comes with two types of interest: fixed rate versus variable rate. Fixed-rate debt will not change based on the broader marketplace or inflation. Variable-rate debt can change (usually increase) based on the Fed’s base rate and market conditions. Take credit card debt, for instance. Because of inflation, credit card interest rates have recently hit record highs. What you charge on a credit card may take years to pay off thanks to the high rate coupled with minimum monthly payments. This puts you into a revolving cycle of “bad debt” that can be hard to escape and doesn’t serve your goals.

According to Nerdwallet.com, “Credit card debt isn’t used to buy appreciating assets. It may be used for depreciating purchases — like home furnishings, clothing items or gadgets — or consumables, such as food and gasoline. There's nothing wrong with any of these purchases, but paying interest on them is unnecessary and can raise their true prices significantly.”**

Consolidate and save

If your high-rate debts aren’t fitting into your financial plan, you can pay off those balances with a consolidation loan and have one lower monthly payment. Lendmark can help you explore this option.