Your Practice, Your Future: Paying Down Debts
by Mike Whitmer on Wednesday, October 09, 2019
Being proactive about your financial health is one of the smartest decisions you can make. And one of the best things you can do for your future is to pay down your debts, which will help you prepare for unexpected expenses or even an economic downturn. No matter the situation, you can make financially smart decisions at any time.
The First Steps to Paying Down Debt
Not all debts are created equal or are to be feared. Debt can help you establish and build up your credit. When your debts are adding up and you’re looking to pay some down, where should you start?
- Develop a budget. Reducing debt starts with understanding your income and expenses and developing a budget if you don’t have one already. The best way to do this is to track your spending for a month or two. Then you can evaluate where you can make adjustments on both income and expenses and widen the margin in your favor.
- Start with the highest rates first. Open a trusty spreadsheet file and list all your debt, current balances and interest rates. Rank them from the highest interest rate to lowest. Pay down debts that have the highest interest rates, such as a high-interest credit card balance, first. Wash, rinse and repeat with each debt on your list from highest interest rate to lowest, but try to pay a little more than the minimum balance due on each. Tackle aggressively if you can.
- Have a plan. This is the most important step. Don’t let yourself feel paralyzed; you have to start somewhere. Tighten your spending, stick to a budget and stay focused. If you’re not sure where to begin, reach out to an accountant or financial advisor to get started. Ask a trusted friend for recommendations if you don’t have one.
Talk with Your Financial Institution Sooner Rather than Later
Did you know that most financial institutions are willing to work with you if you need to adjust terms on your payments? The key is to ask for help before you are at risk or have been delinquent on your payments.
To reconfigure your payments with your financial institution, first reach out to your tax professional or financial advisor to get their suggestions for possible solutions. They can prepare you to talk with your financial institution about extending your terms. You will accrue more interest if you do, but if it is about getting your payments to be more reasonable, the institution might be willing to give you a longer window to repay.
Bottom line: Financial institutions don’t want surprises. Explore your options and talk to them about the challenges you are facing before the problem is too large to address.
Consolidate Your Payments
There are many types of debt consolidation products for all kinds of debt—personal loans, credit card debt, debt that is unsecured, debt that is secured by your automobile. When you combine your debts into a single payment, the goal is to secure a lower interest rate or a shorter payoff period so you are putting more money toward your balance and paying it off more quickly.
Note: Don’t consolidate business and personal debts—it is very important to keep them separate. Depending on how your business is structured, comingling may even invalidate some legal protections. It makes both taxes and accounting cleaner when you keep debt consolidation separated into personal and business expenses.
Tackling Debts is a Team Sport
The best thing you can do for yourself when you’re looking to pay off debt is to assemble a team of key players:
- Financial advisor
- Trusted family and friends
- Combination of any of the above
An accountant or financial advisor, or both, can provide key insights for your specific needs and open the door to conversations with financial institutions. Setting financial goals and sharing them with your advisors and a few key friends also provides accountability. Plus, you can celebrate milestones and wins together.
Life is a team sport, and it is easier to tackle goals when you have accountability.
Debt is Just Part of the Financial Savings Equation
If you’re wondering—is it better to pay down debts than to build up reserves? The answer is both—it depends on your particular situation and household needs.
The right kind of debt can be a positive thing. Debt with the lowest interest rate possible is the best possible debt, especially if it helps you generate income somewhere else. The most important thing you can do is have a plan, stay focused and surround yourself with a supportive team.
- money management