Managing Debt

We work hard to get out of debt, and often, it can seem like an uphill battle. Sometimes it seems like as we cut debt in one area, in grows in another – for example, just when you manage to get out from under your credit card debt, your student loan debt looms. That’s okay – it takes time. Here are some goals to keep in mind as you continue to work on lowering your debt:

1. Match liabilities and assets. In other words, don’t take out a long-term loan for something you can pay off sooner, such as a ten-year loan on a new car. If you do, you’ll still be paying for it even after it goes to the junkyard. Conversely, don’t use a short-term loan to finance a long-term asset like a house. You want your assets to be available to you when you need them.

2. Maintain emergency funds. That means liquid savings. Be cautious about dipping into your savings. For example, refinancing your mortgage to obtain a lower interest rate can be a smart move, but if you have to use savings to cover the closing costs, this is only smart if you can rebuild your savings quickly. In addition, while trying to pay off debt, don’t do it at the expense of your savings. Paying off debts more slowly while saving as much as you can in your 401(K) plan, for example, may be a smarter move – especially if your employer matches.

3. Be prepared for interest rate risk. Variable interest rates haven’t been much of a problem for homeowners in recent years, as interest rates have largely fallen. Eventually, however, the trend will reverse – so take steps now to plan for higher loan payments later.

4. Minimize regular debt expense. This may sound like a no-brainer, but it’s key if you want to get in better shape financially. Even if loan rates are favorable, you are trying to cut down on, not add to, your debt.

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