With all the cold and snow, it is hard to believe that spring is just around the corner. Now is the time to clean the dust and get rid of the clutter. It’s also a good time to take a look at your finances. One place to start is with your debt.
Start by making a list of all your debt: the outstanding balance, the terms, interest rates, payment due dates and the payment amounts. Your list will need to be updated periodically.
Review the interest rates carefully. Perhaps the rates on some of your debt seems high. There might be the potential to refinance this debt to obtain a lower rate, which can result in a lower payment with potentially less interest paid over the loan’s term. Sometimes a cost is associated with refinancing, such as points and closing costs. When considering whether a refinance will save you money, be sure to factor these costs into the equation.
Maybe your list of debts includes a lot of small loans. An option for dealing with this situation is to consolidate those smaller loans into one larger loan. This will simplify your life — instead of many payments to track, you will now have one. It is worth checking out the interest rates and terms you can get on a new loan. Be careful about doing this with student loans — sometimes you may lose favorable terms and benefits on government student loans by consolidating.
Do you have a home equity loan? If you have one, what are the terms? The interest rate might be lower than for other types of loans and using it might be a way to pay off high-interest debt. The disadvantage of using a home equity loan is that it is a loan on your home and the interest rate can fluctuate up and down, so be certain the payment on the line is reasonable and that you can pay it off.
Home equity lines can be a source of emergency funds, as well. It might make more sense to borrow on the line for items such as a home repair than to take money from your other sources. For instance, if the market is down, drawing money from your portfolio to make repairs means the money is not invested during the recovery of the market. Borrowing from the home equity line will give your portfolio time to recover. You can pay the line off with portfolio funds at that point. Drawing from the line of credit is often faster and easier than drawing from other sources.
You might have been able to save some funds over the winter. It now becomes a question of what to do with the money. Would it be better to invest it or to pay down your debt? A way to look at this is to compare the rate of return on your investments with the interest rate on your debt. If the investments seem to be returning less, then paying off your debt with the funds is an option. Before investing or paying off debt, make sure your emergency reserve is healthy.
Your list might also have a significant amount of credit card debt. To clean this you will need a repayment strategy. We have discussed some already, such as debt consolidation and using an equity line. Other strategies might include using an inheritance or employment bonus, increasing the repayments toward credit cards with high interest rates, and using balance transfers.
If your credit card debt seems out of control, discussing your situation with a debt counselor could help you. Be sure to research your options and find a reputable professional. Stop creating more debt.
With these tips your debt picture might be squeaky clean before you know it.