One of the surest ways to sabotage your financial goals is to take on an excessive amount of debt. Unfortunately, it's not difficult to get yourself into that situation. Just consistently spend a little more than you make over a period of time and you will eventually find yourself overburdened with debt. At that point, with much of your discretionary income going to make debt payments, you will typically find you have little or nothing left over to save toward your financial goals. If debt is hampering your ability to work toward your financial goals, make some strict rules:
- Using a mortgage to purchase a home can be a good financial strategy, since you are using debt with a reasonable, tax-deductible interest rate to purchase an asset that will probably increase in value over time.
Just make sure you can easily afford the home. Don't purchase the most expensive home your lender will allow, putting the least amount down. Instead, make a large down payment and purchase a home that won't stretch your budget. Typically, you'll get a lower mortgage rate if you make at least a 20% down payment.
- Be extremely cautious about taking equity out of your home in the form of a home-equity loan.
You might want to set up a home-equity line of credit to use for emergencies, but then make sure it's only used for emergencies, not as a convenience. It may also make sense to use a home-equity loan to pay off higher interest rate consumer loans, but then make sure you don't run up those debts again.
- Control credit card debt.
Credit card balances typically carry high interest rates that aren't tax deductible. The best strategy is to only use credit cards if you can pay the balance in full, thus eliminating any interest payments. If you have trouble controlling the use of credit cards, get rid of them. Only use cash to make purchases. If you don't have the cash, don't purchase the item.
- Come up with a plan to pay off all your credit card debt.
Make a list of all your credit card debts, listing the balance and the interest rate. Are you able to transfer higher interest rate balances to lower rate alternatives? Can you obtain a new lower interest rate credit card so you can transfer balances to that card? Have you contacted your lenders to see if they will lower your interest rate? Once you have consolidated as much as possible, come up with a plan for paying off those debts. Start by paying extra on the card with the highest interest rate. Once that debt is paid in full, move on to the card with the next highest interest rate, continuing until all your debt is paid in full.
- Work on your spending habits.
Face it, you wouldn't be in this situation if you didn't have problems controlling your spending. Put yourself on a budget and stick to it. Look for ways to reduce spending so you will have more money to pay down debt.
- Get help if you can't stick with your plan.
If you can't seem to make any progress in paying down your debt or find yourself running up credit card balances again, call for help.