How to Manage and Reduce Debt

by Kent E. Irwin

The concept of debt management is especially important today as Americans are saving less and are further in debt than at any time in our history. Let us explore what debt is, when it is good and bad, what the consumer should be aware of, and how to get out from under its bondage.

Loans Defined

An arrangement in which a lender lends money to a borrower and the borrower agrees to repay the money, usually along with interest, at some future point in time. Usually, there is a predetermined time for repaying a loan.

Types of Loans: Basic

Reasons for Growing Debt Levels

Americans owe more and are saving less than at any time in modern history. There are many reasons, some of which include:

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Lack of Knowledge: Some people were never taught, or never learned on their own, money management skills and principals of borrowing

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Delayed Gratification: Most people have no patience; they want to borrow to purchase things that they can’t yet afford, instead of saving for them

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Loss of Employment: Many people have lost their jobs, and it may take them time to replace their income or they may be hired at less than they were previously earning

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Health Bills: The cost of health insurance and health care has increasingly consumed a larger percentage of people’s budgets

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Student Loans: Many people come out of college with large student loans

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Inflation: It has been reported that inflation on average has been low (3%); however, recent increases  in health care, gasoline prices, and suburban real estate taxes have taken a heavy toll on the middle class

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Wages: Most middle income people’s salary has not increased to keep pace with inflation

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Inflexibility to Change Lifestyle: Instead of cutting back, some middle income people save less, use up savings, and borrow more so that they don’t have to change their lifestyles

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No Plan: Most people do not have an overall financial plan, including goals for savings and spending. An eFinplan financial plan will help you plan for your future financial goals.

The True Costs of Borrowing

The costs of borrowing are both psychological and economical. Having too much debt is a burden that squeezes family finances and increases stress. The economical costs are provided below. Think of debt as an investment. Does it make sense to borrow money, pay interest to someone else (who is profiting from you) and buy an asset that has less value at the end of term? Or would it make more sense to save money in the bank (who loans it to someone else, giving you part of the profit by way of interest), or buy part of a company that is appreciating in value (which in essence is what stocks are)? The answers to this are obvious.

When people borrow, sometimes what is most important is the monthly payment; however, they often do not consider the overall financial impact. If you master proper use of borrowing, you will end up being financially much better off than other people who have incomes similar to yours.

Tips for Borrowing

The following are excellent recommendations regarding debt and borrowing:

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Credit Cards: Get rid of most of your credit cards and pay off balances monthly. If you carry a balance, switch to a card with a lower interest rate for new purchases and transferred amounts.

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Depreciating Asset Loans

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Automobile: Avoid large automobile loans, purchase used cars with money you saved. If you must borrow, keep a car for 10 years

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Automobile Leasing: Do not use leasing to obtain a car that costs more than you could afford if you purchased it. For example, if you could afford the purchase payment on a $25,000 car, don’t lease a $40,000 one. Look for lease “deals.” Nearly all manufacturers offer low to no down-payment lease plans from time-to-time with very low payments, in order to lower their inventory or to avoid lay-offs. These lease plans can be the preferred automobile solution. Just remember that you will have to obtain another car at the end of the lease.

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Furniture, Department Store, and Appliance: These loans often have the highest interest rates; if at all possible, do not take out these types of loans.

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Home Loans: We have enjoyed historically low interest rates that have allowed the purchase of very large homes. The preferred decision should be to buy a lower-cost home and save and invest more. Instead, people have purchased homes at the very far edge of the bank’s approval amount. The larger the home, the more it costs to insure, furnish, maintain, and heat/cool. In addition, the real estate taxes are usually considerably more.

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Home Equity Loans: These can be attractive for the purchase of automobiles, home improvement and business financing, because the interest can be deductible (consult a tax advisor). However, as with all loans, consider your overall financial plan.

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Debt consolidation loans: Home Equity Loans are often marketed to consolidate credit cards and depreciating asset loans. These are attractive, because of probable tax deductible interest and potentially lower payments. However, many people use the lower payment to go out and buy/borrow more, and then later consolidate again. This never-ending cycle increases debt and eats away at the equity in the home from appreciation.

Clean Up Credit: The better your credit rating, the lower the interest that you will have to pay on loans. Check your credit rating by ordering a credit report. Evaluate the detailed information on the report to:

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Identify bills that you are usually late on

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Find open credit card accounts that you should close

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Look for unpaid accounts: pay off what you owe or contact the creditor if incorrect

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Determine who is checking your credit report

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Guard against identity theft

Tips for Extreme Debt

Some people have large amounts of debt. Follow these suggestions to reduce it.

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Get a second job: A second income can go a long way to helping you pay down your debt. Devote 100% of your new income towards debt reduction.

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Downsize: Buy a smaller, less-expensive home and car; and cut back on unnecessary expenses, such as cable TV and eating out.

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Temporarily stop 401(k) contributions: Direct 100% of the redirected funds to paying off debt.

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Consumer Counseling Agencies: Consult with an agency that can negotiate terms with lenders and establish re-payment plans. Be extremely cautious, as there is a lot a fraud. Research the agencies extensively, and know all of the pro’s and con’s before signing. This is often considered a last ditch effort to avoid bankruptcy.

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Public Assistance: Investigate your options for temporary relief to see if you qualify.

Summary

One bad financial decision can sometimes actually take years to undo. Be very careful with all decisions that you make. Take your time and analyze all your options.

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Create a comprehensive financial plan from eFinplan.com

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Implement that plan using your team of trusted professional advisors

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Monitor your plan regularly to keep track of your progress towards achievement.

Kent E. Irwin is CEO and founder of eFinplan, LLC. He is also a Chartered Financial Consultant (ChFC), a Chartered Advisor in Philanthropy (CAP) and a Chartered Life Underwriter (CLU). He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . For more information about eFinplan, go to the website efinplan.com.

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