Imagine a life where you feel in complete control of your financial future. In this alternative life, you fully understand how much money you bring in and where it all goes.
You have financial goals that become daily habits – no different than getting dressed in the morning. Your money gets put to work in ways that help you most.
Debt doesn’t control you; you control debt.
How do you like this second life of yours?
What if I said by the end of this article, you will have a roadmap for discovering your ideal financial future? That’s exactly what I am saying.
You’re at the beginning of a comprehensive guide for how to manage your debt in a way that actually creates wealth.
This guide offers six concrete, actionable steps to manage your debt.
Step 1: Face Your Current Reality: You Can’t Improve What You Don’t Measure
As the cliché goes, starting is always the hardest part. You’re reading this article. You’ve already begun the process of handling your debt.
The hardest part is over!
Now you simply need to take a hard look at your finances to see where you stand.
Leave no rock unturned.
Check all filing cabinets, online accounts, everything — to determine exactly how much debt you have to wrangle.
A) You Must First Determine What Type of Debt(s) You Have
Here are the many types of loans you may have: student loans, personal loans, credit card debt, mortgages, auto loans, payday loans, business loans, loans from retirement/insurance plans, and any loans from family and friends. Which of these do you have?
You WILL be paying these off at some point in your life except in very extreme cases. In 2005, Congress made updates to the bankruptcy code.
It ruled that no student loan – federal or private – could be discharged in bankruptcy unless the borrower can prove repaying the loan would cause undue hardship.
A recent article in TIME magazine aptly summed it up with the following, “undue hardship is a condition that is incredibly difficult to demonstrate unless the person has a severe disability”.
That essentially lumps student loan debt in with child support and criminal fines – other types of debt that can’t be discharged.
However, the story doesn’t end here. Although difficult to qualify for, there are methods of dismissing your student loans.
If your school closes before you can complete your program, you may qualify for loan dismissal. This only applies to those who attended the school within 90 days of its closing.
If the loan signature was forged, you can get the loan dismissed.
If your loan was falsely certified (the school perhaps falsely certified your eligibility for the loan), you can get it dismissed.
You could also get your loan dismissed if the school doesn’t make the required return of loan funds to the lender.
One last way to loan forgiveness (the most realistic way) is you become a public service employee.
Finally, if you are a member of the U.S. armed forces in a hostile fire or imminent danger pay area; your loans may be forgiven.
An intereting study released by Junior Achievement and PwC US says 24% of millennials believe their student loans will be forgiven.
It seems as though 24% of millennials will be disappointed. At this point in time, it seems more than likely you will have to pay back your student loans.
A personal loan is an unsecured installment loan. The money gets paid back in equal installments over a set period of time. Most people have personal loans for things like remodels, appliances, weddings, etc.
Credit Card Debt
You’re likely very aware of your credit card debt. Swiping your card is a pretty good reminder. When tabulating your debt, remember to include balances of every credit card in your name.
Even if you have a credit card you haven’t used in years, it may carry a balance. Remember to include store credit cards.
Don’t overlook a mortgage just because it’s often viewed as ‘necessary debt.’
You may be accustomed to paying it each month, but remember a mortgage is still debt that needs to be considered. Include your primary residence, any secondary residence, and any rental properties you own.
Consider loans you may have for an automobile, RV, ATV, motorcycle, boat, etc. Are any of them title loans? Title loans are loans in which the borrower provides the title as collateral for the loan.
Also known as a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance.
Payday lenders are often known as predatory lenders.
It’s an unsecured loan connected to the borrower’s payday. Unless you’re in dire straits you probably do not have one of these types of loans.
Have you taken out any small business loans for an existing or past business?
This can include debt financing, equity financing, rollover retirement funds to start a business (or financing an existing one) or alternative financing options you may have chosen.
Loans from Retirement/Insurance Plans
Have you ever borrowed from yourself?
According to an article published by TIAA CREF, “borrowing from retirement plans is common: 29% of those surveyed said they have taken a loan from the savings in their workplace 401(k), 403(b) or defined benefit plan, with nearly half of those (47%) borrowing more than 20% of their savings.”
When asked about borrowing against a life insurance policy Kevin Howard, an insurance consultant and publisher of the Insurance Leads Reviews site, said, “Borrowing against the cash value of a life policy is more treacherous than most consumers realize. There are numerous hidden fees, interest multipliers and tax issues that make the option very expensive.”
Howard went on to say that he does not advise this lending option but if necessary to seek the guidance of a financial professional to understand the unique cost implications based on the borrowers policy and location versus alternatives.
“borrowing from retirement plans is common: 29% of those surveyed said they have taken a loan from the savings in their workplace 401(k), 403(b) or defined benefit plan, with nearly half of those (47%) borrowing more than 20% of their savings.TIAA CREF
Loans from Family/Friends (legally binding or otherwise)
Don’t forget about these!
Think back to when you’ve ever borrowed money from people outside of an ordinary lending institution. If you’re having a hard time wanting to pay these folks back but know you should, make the loan official.
Create a promissory note for personal loans from family and friends. Consult this guide for a how-to.
B) Discover the Amount of Each Debt
I say ‘discover’ because it’s hard to know exactly how much debt you have for each loan until you see live numbers. Interest accrues quickly.
Do not reference a statement even a month old and assume that’s your current debt. Preferably, get today’s numbers – especially for large loans.
C) Discover the Interest Rates (APRs) of Each Debt
You need this information for later in the debt analysis process. So far you know what type of loan(s) you have and the total value of each. The final part of ‘Step 1’ is to discover the interest rates of each loan.
If the interest rate is variable (also known as adjustable or floating), you have a little more to do. You essentially need to do your best to predict the future.
With variable rate loans, do your best to predict the future rates.
For credit cards, this is fairly easy. You may be at a low introductory rate right now, but determine when the rate will end. Then note what the regular interest rate will be.
You need a crystal ball to predict future interest rates with other types of loans. A HELOC for example, will state the maximum possible interest rate in fine print.
Predicting where adjustable interest rates will go is impossible. Some educated guesses can be used; but understand that you’re never 100% sure what the future holds.
Not even your bank can give accurate future numbers until the Federal Reserve releases their rates at the beginning of each month.
It’s because your bank usually borrows from the Federal Reserve. Your bank needs to know how much it will cost them to give you a loan before they can determine what they will name your current interest rate.