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How can I manage my debt?

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Welcome to the Online Community! From now until Monday, October 28, AARP Expert Martin Booker (@MartinBooker) is here to answer your questions on how to successfully manage debt while preparing for retirement.

Have you been burdened with loans and need strategies to lower debt, or are you seeking advice on student loan repayment? Martin has assisted more than 1,000 people with credit and debt management. Post below for a chance to have your question answered! 

 

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Message 10 of 31

Good Afternoon @AARPLynne

 

This is a great question. Here are a few practical tips about managing debt:

 

1. Know yourself- If you are a person that will easily go into debt, you have to take this into consideration when having access to debt. If you will easily go into debt, be careful of your spending limits and amount of debt you borrow. Highly disciplined people can have access to debt and not use it, but if this is not something that you can do well, limit your accessibility to your credit card and other forms of debt. 

 

2. Protect yourself from debt- If you are highly disciplined, you may use a credit to pay all of your bills and pay yourself with rewards. If you are a little disciplined but not very well disciplined, you may need to leave your credit cards at home so that you don't have them on your person when you're in public. If you do not have discipline, you may not want to have a credit card. If you do not have them, you will not use them. But remember that you must know yourself in order to know which strategy to use. 

 

3. Budget your personal income- As you successfully manage your cashflow, you may not have to turn to debt for regular expenses. Through consistent budgeting, some of your income will cover personal expenses and some can be saved to cover emergencies. By doing so, you will be able reduce your reliance on debt in most cases. Budgeting allows you to plan out how your money will be spent, before you recieve it. Your budget will let you know if you have enough income to cover all of your expenses. 


Can you share, what are some practical strategies to effectively manage your debt?

 

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Re: How can I manage my debt?

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Hello @AARPLynne

 

A great rule-of-thumb is to eliminate as much debt as you can in order to prevent yourself from paying more interest on your loans. While everyone can't be 100% debt free right away, it is a good idea to reduce your debt when possible. Too much debt could be defined as any amount that is a burden to pay back.

 

Here are some examples of debt burdens:

 

1. Having a loan that consumes the majority of your monthly income, leaving you to compromise on covering other expenses.

 

2. A loan that has very high interest rates that makes paying off the loan nearly impossible (ex. An auto loan with a 20% interest rate)

 

3. Loans that you believe you will never be able to payoff due to the balance

 

Here are some options in these cases:

 

1. Find a way to refinance the loan for a lower interest rate and lower monthly payments. In some cases you may have to pay extra towards the loan to lower the balance in order to refinance. 

 

2. Sell the item as some loans may have a high interest rate or too large of a balance so selling the item and purchasing another (if the numbers workout), can be a way to get out of the unfavorable loan. 

 

3. Before taking on a loan, understand the interest rate, monthly payment and the impact that this will have on your current budget. Knowing how much you can comfortably afford before taking a loan will help you to avoid a debt burden. 

 

In cases where the debt is not a burden, you still want to be aware of how much debt you incur. The interest you pay could be taking away from your hard earned money. 

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Message 14 of 31

Hello Lynn, 

 

Great question! Debt consolidation can be a good strategy if you have an overwhelming amount of debt accounts and need a streamlined process for payoff. Another situation in which debt consolidation can be helpful is in cases where someone has multiple high interest loans with high balances that could be consolidated to pay less in interest. In some cases, consolidating your debt can lead to a higher monthly payment but a lower interest rate. If this doesn't cause a strain on your monthly budget, consolidating your debt could be helpful. 

 

Debt Consolidation would not be helpful if you pay off the debt and accumulate the same debt again; so take time to address the habits that lead to debt accumulation. Another potential pitfall in debt consolidation is accumulating more debt after consolidating your loans. In some cases, the lines of credit that are consolidated remain open and if the habits that accumulated the debt aren’t addressed, you are at risk of accessing that debt again. This will lead to a large loan from the consolidated debt and additional debt from the current lines of credit or the new lines of credit that you use. Overall debt consolidation could lead to paying less interest and streamlining the payoff process, but throughout the process, be sure to focus on changing the behaviors that caused the debt in order to avoid repeating the same situation or accumulating more debt.

Before deciding to consolidate your debt, organize your loan accounts and make an attempt to manage the debt yourself or with help from family, friends or a professional. One way to get organized is to use a debt payoff chart and take advantage of the debt snowball or debt avalanche. If this does not seem feasible, you can consider consolidation but it is helpful to close or limit your access to any accounts that remain open after the debt consolidation is complete.

 

Here is a debt consolidation calculator and a credit card payoff calculator courtesy of AARP: 

https://www.aarp.org/money/credit-loans-debt/debt_consolidation_calculator.html

https://www.aarp.org/money/credit-loans-debt/credit_card_payoff_calculator.html

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Message 16 of 31

Hello @AARPLynne

 

Great question! Debt consolidation can be a good strategy if you have an overwhelming amount of debt accounts and need a streamlined process for payoff. Another situation in which debt consolidation can be helpful is in cases where someone has multiple high interest loans with high balances that could be consolidated to pay less in interest. In some cases, consolidating your debt can lead to a higher monthly payment but a lower interest rate. If this doesn't cause a strain on your monthly budget, consolidating your debt could be helpful. 

 

Debt Consolidation would not be helpful if you pay off the debt and accumulate the same debt again; so take time to address the habits that lead to debt accumulation. Another potential pitfall in debt consolidation is accumulating more debt after consolidating your loans. In some cases, the lines of credit that are consolidated remain open and if the habits that accumulated the debt aren’t addressed, you are at risk of accessing that debt again. This will lead to a large loan from the consolidated debt and additional debt from the current lines of credit or the new lines of credit that you use. Overall debt consolidation could lead to paying less interest and streamlining the payoff process, but throughout the process, be sure to focus on changing the behaviors that caused the debt in order to avoid repeating the same situation or accumulating more debt.

 

Before deciding to consolidate your debt, organize your loan accounts and make an attempt to manage the debt yourself or with help from family, friends or a professional. One way to get organized is to use a debt payoff chart and take advantage of the debt snowball or debt avalanche. If this does not seem feasible, you can consider consolidation but it is helpful to close or limit your access to any accounts that remain open after the debt consolidation is complete.

 

Here is a debt consolidation calculator and a credit card payoff calculator courtesy of AARP: 

 

https://www.aarp.org/money/credit-loans-debt/debt_consolidation_calculator.html

https://www.aarp.org/money/credit-loans-debt/credit_card_payoff_calculator.html

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Message 17 of 31

Staying out of debt takes intentionality and awareness. A person who can easily go into debt must safeguard themselves from their habits and behaviors. Here are a few things to consider when aiming to stay out of debt:

 

1. What is my relationship with debt? - Am I someone who does not mind carrying debt of any kind? Am I completely opposed to debt? Do I say that I’m opposed to debt but often find myself back in credit card or personal loan debt?

 

Being able to identify your relationship with debt will help you use the proper tactics to stay out of debt. For example, once I am aware that I don’t want debt but keep going further into debt, now I have to identify and address my habits and behaviors that is keeping me in debt.

 

2. What am I doing to go into debt? – Is it emergencies because I do not have saving in an emergency fund? Do I continue to buy items that I see on TV and can’t seem to stop ordering new things on my credit card? Am I spending all of my income on my family which leaves me to use debt to cover my expenses?

 

Once we find the issue, we have an opportunity to address it. In the first scenario, we have to be intentional about saving so that we don’t have to use debt when an unexpected expense arises. In the second scenario, we may need to put s spending limit on our cards (this can be done with the some banks and credit card companies) or avoid the channels that cause us to spend money. You may have to go as far as getting that channel blocked if it’s a cable provider. In the third scenario, you may have to set boundaries with your family so that you can cover your expenses first.

 

3. What are ways to combat myself? – You may be the person that should not carry your credit cards out of the house because you will use them without planning. It’s also a good idea to lower your debt limits if you won’t be able to control your urge to borrow more money. Lastly, you can avoid the places that cause you to spend the most. If the mall is where you like to go walking, but you always tend to shop while you’re there, you may have to switch to a mall that doesn’t have your favorite store or do a complete change of scenery for your walk -- like a museum.

 

Tell us about ways that you have successfully stayed out of debt?

 


@AARPLynne wrote:

...do you have suggestions for how someone can stay out of debt?


 

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Message 19 of 31

Good Morning Lynne,

 

Great question! Debt is a tool that can be helpful or harmful depending on how it is used. Debt can be used to your advantage if it is purchasing assets that produce monetary value. For example, if I purchase a rental property that is cash flowing or has more value than the loan balance that I carry (You owe $60,000 but the property is worth $130,000). Although this debt can work in your benefit, it’s still debt which has risk involved such as defaulting on the loan if you can’t pay the debt back. Debt will also allow you to purchase assets like a home that you may not be able to buy in cash. Some things to consider when taking steps to use debt to your advantage is:

 

Will this debt make me money? – A good exercise before taking out a loan to make a purchase is to consider if you finance this item, how will it work to your benefit financially?

 

Do the numbers work in the short and long term? – Make sure that you’re not making an investment with debt that will leave you with financial or emotional strain later. You may try to use debt to start a business but the business will take years to return a profit. Are you prepared to maintain the business until it has a positive return?

 

What are my risk? When you aim to use debt to your advantage, you want to think through the worse possible scenario if things go wrong. What could you possibly lose? Sometimes you can lose more than you expect. If you default on the business and have a desire to start another, you may have to rebuild your credit (or financial reputation) before starting again.

 

A proper business plan and analysis should be done prior to using debt to profit because there are risks involved. For larger purchases such as a home to live in, be sure to do long term planning as well to make sure that your home is good buy.

 

Re: Are some debts worse than others?

 

When it comes to debt, some debt carry higher consequences than others. The consequences from debt is typically higher interest rates which leads to higher monthly payments. For example, your credit card can carry an interest rate of 18% to 25% while your mortgage can be below 5%. Your credit card is considered consumer debt and is usually used on items that will not rise in value financially so this debt is not as favorable when you’re pursuing a loan.

 

A type of loan to avoid is a predatory loan. These are loans that carry extremely high interest rates, have higher-than-normal monthly payments and can be attached to things of value that you own. An example is what is known as a “car title loan” where you use your car as collateral to secure the loan which means that if you default, your car will be owned by your debtor. Another type of predatory loan is known as a “Payday loan” which can carry an interest rate of over 150%. By the time that you finish paying back a $400 loan, you can over $3500. These loans tend to target individuals that are in desperate situations and in need of money or individuals with lower credit scores. Many states have laws against payday loans. Predatory loans can be given as personal loans, credit card loans, auto loans and home loans. Be sure to know the details of your loan before signing up.

 

Another debt that can be harmful is defaulted debt that is showing up on your credit score. Loans that are defaulted typically go to collections and show up on your credit report this way. This type of debt will decrease your ability to borrow money until it is paid back and could be garnished from money that you are receiving. For example, defaulted student loans can lead to Social Security or paycheck garnishment. Be sure to check your credit report, which you can do for free with all three bureaus one time a year at www.annualcreditreport.com to make sure that you do not have any outstanding debt in collections.

 


How can we use debt to our advantage? Are some debts worse than others?

 

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Message 21 of 31

Lynne it has been a pleasure to engage with the online community on such an important topic. Thank you for having me throughout this week. This is a great question and there are a few things to do in the moment of feeling overwhelmed with debt.

 

First, stop and breathe- You may feel like you will never get out of debt or that you want to retreat from the situation but take a moment and to calm yourself and know that there are solutions to address this issue. Taking time to breathe will help you from making irrational decisions due to being overwhelmed. In the past when I’ve sat down with people and they would tell me how much debt they have, it was always a smaller amount when we actually pulled their credit report and calculated the debt. We tend to make issues larger in our own heads.

 

Secondly, get organized- I was once told that you can’t fix what you don’t face. You have to find your debt and organize them so that you know who you owe and how much. This will help with a plan of action to pay it back. Also, having a budget will help you to know how much income you have available to pay toward debt.

 

Your third step is to gather the critical data- At the moment of being overwhelmed and hitting your tipping point, you may already have some loans that are past due or defaulted. You may also have multiple loans to manage. At this point, you will want to know the critical details of each loan such as the past due balances, current balances, interest rates and due dates. This will help with the strategy for paying down debt. For example, if you know the past due amounts, you can also find out how many months behind each bill is at the moment. You may want to begin paying on the bill that is likely to go into default status first to avoid further damage to your credit.

 

Lastly, use the Avalanche or Snowball method to lower debt- Once you have this critical information in the steps above, you can begin paying down your debt. The debt snowball focuses on paying the smallest debt balance first regardless of interest rate. The idea is that consistent small wins will keep your momentum high while reducing debt. The debt avalanche is a method of paying the loan with the largest interest rate first regardless of the debt balance. The idea is that this method will cause you to pay the least amount of interest while paying down your debt.

 

Throughout any of these steps, you may want to find a financial professional or trusted friend/family member to assist you with getting organized. At times, a second set of eyes can be helpful in getting back on track. Also, the accountability and encouragement from another person can be beneficial. Before reaching out to a paid professional, check in your area for a local Financial Empowerment Center or other nonprofit group that offers financial coaching and other financial services.

 

Review our AARP Money Map for more tips on how to overcome unexpected debt https://moneymap.aarp.org/

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Message 29 of 31

Hello @AARPLynne,

 

Great Question! Overall, clearing out consumer debt (credit cards, personal loans and some would argue car loans) is better to pay off before saving your full emergency fund. This reason for this general rule is to minimize the amount of money you will lose in paying interest. Saving money in some of the highest interest rate savings accounts will gain less than 2% annually, while the consumer debt can range from 7% to 25% annually.

 

Although that is the general rule, it is wise to factor in your lifestyle and situation. If you do not have a safety net in case of an emergency, you would want to have a larger emergency savings than someone who has family to rely on or friends that can cover emergencies for them. It is always good to consult an expert or talk your situation over with someone who can help you think through your strategy holistically.

 

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RE: @MartinBooker, what advice would you give someone if their child (or grandchild) is asking them to cosign on an auto or home loan? Should they consider doing it?

 

For anyone that is being asked to co-sign on a loan, I would advise them to consider the following:

 

1. Can you cover the debt in totality if this person does not pay? -  If you become a co-signer, you have signed up for the debt along with the other person. Between the two of you, the debt must be paid on time monthly or both of your credit scores will be damaged. If you decide to cosign, be willing to take on the debt if the person is no longer able to pay.

 

2. Are you willing to add debt to your credit report? -  If you are in the process of needing to use debt for a personal matter such as purchase a home, you will be limited in the amount of debt you can access after adding debt as a co-signer. Be sure to think about any future purchases that you will be making that will require debt before co-signing.

 

3. Do you have the income and credit score to do so? - Co-signers are needed to meet income and credit requirements. If you do not have a low enough debt-to-income ratio or enough income, you may not qualify to co-sign.

 

If you have family or close friends that need to build their credit, you can help them by allowing them to become an authorized user. Being an authorized user will allow them to piggyback on one of your credit cards to build their credit history. You can do this with or without providing access to the credit card. If you make someone an authorized user, be sure to manage your debt well so that you don’t hurt their credit score.

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RE: @MartinBooker, we thank you again for being our guest AARP Expert over the last week. As we wrap up the special event today, are there some additional resources or reading materials you'd like to share with our audience?

 

Hello @AARPLynne,

 

Thank you for having me on this week. It has been truly a pleasure to share what I know with members of the online community. As we close out the week, I would like to provide the following resources:

 

Emergency Medical Debt- https://moneymap.aarp.org/

National Debt counseling and Credit Coaching- National Foundation for Credit Counseling (NFCC) www.nfcc.org

Greenpath Financial Wellness https://www.greenpath.com/

Mortgage Calculator- https://www.aarp.org/money/credit-loans-debt/mortgage_payoff_calculator.html

Personal Debt Consolidation Calculator - https://www.aarp.org/money/credit-loans-debt/debt_consolidation_calculator.html

Credit Card payoff Calculator - https://www.aarp.org/money/credit-loans-debt/credit_card_payoff_calculator.html

Home Budget Calculator - https://www.aarp.org/money/budgeting-saving/home_budget_calculator_pubs.html

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About Martin: Martin Booker @MartinBooker is a member of AARP’s financial resilience team, leading financial education initiatives focused on social security, budgeting and investing. Before joining AARP, Martin worked in the non-profit sector where he developed a passion for helping people improve their money habits. He has a master’s degree in social work from the University of Connecticut and earned a Certificate in Financial Planning at Georgetown University.

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Message 3 of 31

Sounds pretty cool, Lynne!

 

I currently don't have any debt myself (and I am now retired) but I know that many people have a lot of debt as they approach retirement or even when they're retired. I have even seen people posting here on the AARP forums about the impact the debt has on their life; it can be quite unfortunate. I think there's a great need for education on these issues.

 

Okay, I'll start the ball rolling. I have heard of the "debt snowball" as put out by guru Dave Ramsey. In this method you make minimum payments on all debts and then apply whatever other money you have available to pay off the smallest balance. The idea is that the "paying of debts" then "snowballs" as each smallest account gets paid off.

 

Personally I don't subscribe to the philosophy of the debt snowball. In all cases one would be better served by paying off the highest interest rate account first, then work down, regardless of the individual balances. Mathematically, this leads to the lowest amount of interest paid and results in the quickest pay off of all accounts. I have actually modeled this in a spreadsheet for people and demonstrated this. It will make a sizeable difference in total interest paid although the time duration may not vary all that much, and of course this depends on the balances and interest rate. But it is mathematically true that this results in the lowest dollar amount in interest and the quickest pay off.

 

I think the snowball appeals to some personalities as there is a "jackpot" hit when one account is paid off. It encourages people to continue. Personally, I think this may just feed any issues that may have led to high debt in the first place. On the other hand, many people will wind up in debt as a result of uncontrollable issues such as medical expenses or forced early retirement, and these situations aren't due at all to personality issues.

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Other than one dental balance to pay, I do not have any debt and do not want any. I am a former student of the Dave Ramsey Financial Peace University program and it is truly the BEST financial education I've ever had! It helped me tremendously! Other than a recent emergency dental balance, I remain debt free and will get my dental balance paid off as soon as possible. We were always told as children to take care of our needs first, and then we can have some of our wants. Great advice from one of my maternal aunties...GOD rest her sweet soul. What works for one may or may not work for another so just choose and do what works best for your own personal financial journey. Smiley Happy

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Message 5 of 31

Hello @FredSmif

 

Thank you for getting this important conversation started and discussing the two popular methods of debt reduction. As you mentioned, the debt avalanche, which is the method of paying off your debts based on highest interest rate, will allow for a person to pay the least amount of interest when paying their debt.

 

The alternative option is the debt snowball which has been poularized by Dave Ramsey. The debt snowball is a method of paying down your debt based on the smallest loan balance first without factoring in interest rates. This method has been known to build off of momentum and small wins instead of cost efficiency. So the debt avalanche is based on dollars and the debt snowball is based on a more behavioral approach. 

 

For anyone that is aiming to payoff debt from a credit card, using a debt reduction calculator such as this one is a good first start: Go to Credit Card Calculator

 

 

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Message 6 of 31

Hello r447879w, 

 

I agree with your comment that "what works for one might not work for another" or as we would always say during financial coaching, "personal finance is personal". When you factor in our habits, education, beliefs and more, we will all approach our finances differently. 

 

Since you mentioned a recent unexpected medical expense, you may want to take a look at our AARP Money Map™ which focuses on taking control of unplanned expenses such as medical expenses. Click here to learn more about AARP Money Map™ (free for all ages; no membership required).

 

 

 

 

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Message 7 of 31

My advice is don't incur debt.  Live within your means.  Then you won't have any debt to manage!

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Message 8 of 31

Good point, @2Papa!

 

What are some practical steps to keep your debt low? How have you been successful in times of emergency or in day to day activity? What are tips that you could share with others?

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Message 9 of 31

Good morning, @MartinBooker! Can you share, what are some practical strategies to effectively manage your debt?

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Message 10 of 31

Good Afternoon @AARPLynne

 

This is a great question. Here are a few practical tips about managing debt:

 

1. Know yourself- If you are a person that will easily go into debt, you have to take this into consideration when having access to debt. If you will easily go into debt, be careful of your spending limits and amount of debt you borrow. Highly disciplined people can have access to debt and not use it, but if this is not something that you can do well, limit your accessibility to your credit card and other forms of debt. 

 

2. Protect yourself from debt- If you are highly disciplined, you may use a credit to pay all of your bills and pay yourself with rewards. If you are a little disciplined but not very well disciplined, you may need to leave your credit cards at home so that you don't have them on your person when you're in public. If you do not have discipline, you may not want to have a credit card. If you do not have them, you will not use them. But remember that you must know yourself in order to know which strategy to use. 

 

3. Budget your personal income- As you successfully manage your cashflow, you may not have to turn to debt for regular expenses. Through consistent budgeting, some of your income will cover personal expenses and some can be saved to cover emergencies. By doing so, you will be able reduce your reliance on debt in most cases. Budgeting allows you to plan out how your money will be spent, before you recieve it. Your budget will let you know if you have enough income to cover all of your expenses. 


Can you share, what are some practical strategies to effectively manage your debt?

 

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