"Living within your means" is way easier said than done for most. Debt can add up pretty quickly and leave you feeling overwhelmed. That's where we can help. If you've reached a point where you realize your life would be a lot less stressful if you didn't have as much debt to worry about, here are a few steps to start tackling your debt.
1. Gather all your bills and other related papers
Gathering all your information in one spot helps you create a snapshot of your complete situation and makes it easier to formulate a plan. Make a list of the following items and if you can't find the info, call your lender or credit card company and ask.
- Your balance on every account
- The interest rate and whether it's tax-deductible
- Whether those interest rates can change, when and how
- Whether there are any prepayment penalties for paying an account early. (More and more common with some home and auto loans)
2. Prioritize your debt
Sort by what is tax deductible and nondeductible. Personal loans, credit cards, and car loan interest is not tax deductible. On the other hand, you get a tax break on the interest paid on mortgages, home equity loans and some student loans (depending on your income. Consult a tax professional for more information).
Then, list your debts from highest interest rate to lowest. If you have a balance on a credit card that offers a low rate for a limited time, use the higher rate that will eventually apply.
3. Set goals
Choose your highest-rate, nondeductible debt as payoff goal #1. Set your eyes on the prize of getting this one paid off entirely. Then move on to target #2.
While paying the minimum on your other debts, pay as much as possible on your target debt. Once you've paid off that debt, take the same amount of money and apply it to your next highest-rate debt and so on until your non-deductible debt is gone. We know it's a process but it will get easier for every financial milestone you hit!
Now, you can start tackling your deductible debt or possibly building your savings and investment account balances.
4. Live a debt-light lifestyle.
After going through all the work to reduce your debt, enjoy your newly found financial freedom, but be sure to watch taking on debt in the future. You cannot lighten your load if you are adding to it at the same time.
The debt consolidation journey can be a challenging one. But if you keep working at it, your financial freedom will be well worth it! While working toward achieving these milestones, remember to be realistic about your goals, make gradual changes, be honest with yourself and be prepared for the unexpected.
*This plan assumes that you are not already falling behind or in other serious credit trouble. If you are not able to make minimum payments or you’re behind on your debts, you may need to pursue a different course. Stop by a branch or give us a call and we help you find your way.