INVESTMENTS, Tim Tremblay
Debt can be simply understood as the amount owed by the “borrower” to the “lender.”
A debt is the sum of money that is borrowed for a certain period of time and is to be returned along with the interest. The amount as well as the approval of the debt depends upon the creditworthiness of the borrower.
Debt can be a very important, positive part of one’s financial plan. But you have to be prudent with your debt. My Mom, who was born on a farm in Wisconsin, always told me, “Don’t buy it until you have the money to pay for it!” When her shoe had a hole in it, she would put cardboard in her shoe until she could afford to buy new ones.
Our young people today, on the other hand, want to get the newest, latest gadget — and they want it now! Put it on the credit card!
The U.S. government has been anything but prudent with its approach to debt. If the U.S. government were a company, it would be close to bankruptcy! For the first time since World War II, the U.S. debt is now higher than the Gross Domestic Product (the monetary measure of the market value of all the final goods and services produced and sold in a year).
The U.S. debt today is over $31 trillion. The deficit (the amount of money the government spends over the amount it brings in) is now over $1.3 trillion. U.S. unfunded liabilities (debt obligations that do not have sufficient funds set aside to pay them) are now over $181 trillion!
Our politicians must get their house in order sooner rather than later! This is not a political view. It is simple math!
Debt is a part of most Americans’ finances. Most home purchases are done via a mortgage.
Easy debt with high interest rate credit cards has become the norm for many. With interest rates moving up and a difficult economy on the horizon, debt is becoming more and more of a problem.
Digging out of debt is a tough job! The reality is 44% of credit card bills aren’t paid in full each month, leaving a revolving balance. And credit card holders have an average balance of more than $7,000!
But it doesn’t have to be this way. Look at strategies to reduce debt.
Start by paying off the most expensive debt. Simply put, it just makes sense to pay off the credit card with the highest APR (annual percentage rate) first. This method will help you get out of debt the fastest. After all, why pay a high interest rate on a revolving balance?
Another approach is to gain momentum by paying the lowest balance first. While starting with the card with the highest APR makes financial sense, it can become disheartening for those struggling with a high balance or those who are burdened with multiple credit card balances. Some credit card holders would prefer to start with the card with the lowest balance and pay it off in full. The psychological boost of wiping out one debt at a time can be a worthwhile incentive to persevere with the process.
Once the first bill is tackled, pay off the second lowest balance. This strategy, also known as “the debt snowball plan,” helps people gain momentum as they eradicate one bill at a time.
Consider a credit counseling service. Those who carry a high amount of credit card debt, or who just feel overwhelmed, might consider a credit counseling agency. Clients are offered a repayment plan that can greatly reduce or even eliminate interest charges.
Professionals negotiate with creditors to create a single monthly repayment plan so people can get out of debt faster and without spending hundreds or even thousands in interest.
And don’t forget … Stay the course!
Tim Tremblay is president of Tremblay Financial Services in Santa Barbara (www.tremblayfinancial.com).