In the next few weeks, we are going Back to the Basics. Debt management, budgeting, saving, investing, life insurance, and retirement planning are the topics we will cover. You may not realize this, but these subjects are all connected. If you are in debt, you can't save, and a budget helps you control your debt so you can save. If you save, you have the funds to purchase life insurance and have an emergency fund, and you can start funding your retirement through investing.
We want to take you back to the basics, so you can learn how to budget so your debt is manageable or eliminated. We want you to be able to save so you can afford life insurance and build an emergency fund. Once these are accomplished, it is time for retirement planning, and this is where Dixon Financial Group comes in. Let's start with managing debt; read on to learn more.
Managing debt can be a challenge, but it's important to have a plan in place. Here are a few tips to help you get started:
- Understand your debt. The first step is to figure out how much debt you have and what kind of debt it is. Make a list of all your debts, including the amount you owe, the interest rate, and the minimum payment.
- Set a budget. Once you know how much debt you have, you can start to create a budget. A budget will help you track your income and expenses so you can see where your money is going.
- Make a plan to pay off your debt. Once you have a budget, you can start to make a plan to pay off your debt. There are a few different ways to do this, such as the snowball method or the avalanche method. The snowball method involves paying off your smallest debts first, while the avalanche method involves paying off your debts with the highest interest rates first.
- Stick to your plan. The most important thing is to stick to your plan. This can be tough, but it's important to stay motivated and focused on your goal.
Here are some additional tips to help you manage your debt:
- Make more than the minimum payment. This will help you pay off your debt faster and save money on interest. *The snowball method mentioned above works like this. You take your lowest-balance credit card and pay as much as you can each month while only paying the minimum on the higher-balance cards. Once that card is paid off, you will take that amount you were paying and add it to the minimum payment of the next lowest amount credit card while still paying the minimum on the higher balance cards. As you pay off credit cards, you are adding the payment you were making to the minimum of the next card; after paying off a few credit cards and freeing up more cash, you are able to make a larger payment to the next credit card which speeds up the process and eliminates the debt faster. This is why it is called the Snowball method. As you pay off credit cards, the amount you can pay on the remaining cards becomes larger as you pay each one off.
- Cut back on your expenses. Look for ways to cut back on your expenses so you can free up more money to put toward your debt. There are many ways to cut back on expenses, such as cooking at home more often, canceling unnecessary subscriptions, and shopping around for better deals on insurance and other services.
- Get help if you need it. If you're struggling to manage your debt, there are resources available to help you. You can talk to a LPL financial advisor and join a debt consolidation program; doing this may help manage risk for having to file for bankruptcy.
Debt management can be a challenge, but it's important to remember that you're not alone. There are resources available to help you, as well as the Dixon Financial Group Team.
*Next week, we will talk about creating a budget and sticking to it.
David S. Dixon, CFP®
Jacob S. Bierstedt, CFP®, ChFC®