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Budgeting (Part III): Debt checkup – how much do you really owe?

Credit cards, car loans and the mortgage are all contributing to your debt load. If you want to pay off debt faster or just be in a better financial situation a year from now, it’s time to work on your budget. We’ve been working on setting up a healthy household budget this past week, and today, we’re going to dive right into debt management. It’s important to keep in mind that not all types of debt are necessarily bad — some forms of debt, such as your mortgage, are actually considered to be a ‘good’ debt because they help to prove creditworthiness. Other forms of debt, such as store credit cards, car loans and payday loans, fall into the ‘bad debt’ category because they can have a negative impact on your credit score and may be a sign that you are living beyond your means.

Debt checkup step-by-step

This week’s budgeting task is to focus on debts listed in your fixed or variable expenses categories. Use this step-by-step guide to analyze your current debt load:

  1. List all current liabilities. Pull out all billing statements and loan payment stubs to determine how much you are responsible for paying each month. You need to include: all credit cards, bank loans, personal loans, business loans, student loans, taxes and mortgage payments in this list. Make a comprehensive list of the minimum payment for all of these liabilities and the interest rate you’re paying then make a list of the outstanding balances.
  2. Prioritize your debts. Go back to your list of liabilities and determine which debts have higher balances and high interest rates. Rank your credit cards from highest to lowest interest rates to see which credit cards need to be paid off faster.
  3. Review the budget. You need to know how much you have available for debt payments before you can put together a realistic payoff plan. Comb through your budget to determine how much you have left over after all income has been accounted for and all expenses have been taken care of, including any savings contributions. You can adjust these figures after you have a baseline to work with.
  4. Negotiate interest rates. If you have a good track record of making payments on time, you may be able to negotiate interest rates with your lenders. Contact credit card companies and your bank to find out if any of your rates are negotiable.
  5. Organize payments. Go through each type of debt individually to determine how much you can realistically pay each month. Choose a figure that’s higher than the minimum payment on credit cards so you aren’t paying high interest rates. Consider making larger payments towards your mortgage, student loans, and other ‘fixed’ payment debts if you can afford to.
  6. Budget for debt payments. Turn those debt payments into a recurring expense by putting the total payment amount right into your budget. As long as you are making more than the minimum payment on those credit cards and paying down other loans consistently, you will be on track to pay off that debt sooner than later.

Debt payoff tips

Here are some other things you can do to pay down that debt load that much faster:

  • Find ways to increase income to make more payments towards your debt load (in a perfect world, right?)
  • Consider balance transfer offers
  • Pay off higher balances and high-interest rate credit cards first
  • Negotiate rates on your bills, such as cable and telephone, or switch providers to save money and make larger debt payments
  • Consider consolidating high interest debt under a lower interest line of credit. This is also a good time to cut up those high interest credit cards.
  • Scale back spending on entertainment and luxury purchases to free up cash for debt payments
  • Consider dipping into savings to pay off debt
  • Consolidate high-interest debt like store credit cards into a single, lower interest debt like a line of credit. Word to the wise: This is a good time to take stock of your credit cards and which ones you actually need. Avoid the temptation of running those credit cards back up.

We’ll discuss more debt payoff strategies and money-saving tips in future posts. Stay tuned for the next segment where we’ll talk about creating a solid savings strategy.