How to Manage Debt
Debt Management: A Personal Perspective and Practical Strategies
Debt management is a subject close to my heart—it’s one of the reasons I pursued a career in finance. During my time in the Air Force, I witnessed firsthand how easily debt could derail lives. Military members often have a steady paycheck, which makes them prime targets for predatory lending practices. Car dealerships, for instance, would happily sell vehicles at inflated prices because they knew servicemembers were likely to make payments. Similarly, there was a tendency to rely on credit cards during work trips, often rationalized by the idea that such opportunities were once-in-a-lifetime.
The result? Many people were buried in debt, draining their bank accounts and leaving little room for savings or future goals. This isn’t just a military issue—it’s a universal challenge. That’s why I’m passionate about helping people make their debts manageable.
What is Debt Management?
Debt management is about regaining control over your finances by addressing the weight of debt in your budget. It’s often the first step in any financial plan. Key questions to ask yourself include:
How can I eliminate debt from my budget?
How can I free up income to focus on savings and long-term goals?
How can I simplify my bill-paying process?
Where to Start: Prioritizing Debts
Debt can feel overwhelming, especially if your income isn’t enough to pay off everything quickly. The key is to start somewhere. My usual starting point is interest rates:
Target the highest interest rate debt first. High-interest debts, like credit cards, cost you the most over time.
Consider the debt’s size and emotional impact. For smaller debts, paying them off quickly can provide a psychological win and simplify your finances.
Example:
You might have a $200 credit card at a 22% annual interest rate ($44/year) and a $10,000 credit card at 10% ($1,000/year). While the larger card costs more in interest, eliminating the smaller debt might free up cash flow and simplify your payments.
The goal is to eliminate smaller debts quickly, roll those freed-up payments into larger debts, and repeat the process. This method, often called the "snowball effect," builds momentum and reduces the mental burden of juggling multiple debts.
Refinancing and Consolidation Options
Refinancing and debt consolidation can make debt more manageable by lowering interest rates and combining payments into a single, predictable expense.
Personal Loans
Personal loans for debt consolidation replace variable credit card payments with a fixed, amortized loan.
This turns an unpredictable expense into a structured repayment plan with a clear end date.
Balance Transfers
Some credit cards offer 0% interest for a promotional period (e.g., one year).
This can be a great tool if you can pay off the balance before the promotional rate ends.
Be cautious: failure to pay off the balance in time often results in retroactive interest.
HELOCs (Home Equity Lines of Credit)
If you have equity in your home, a HELOC can provide a lower-interest alternative to credit cards.
While this puts your home at risk, it can drastically lower interest payments and make budgeting easier.
Cautions When Refinancing
Refinancing isn’t without risks. For example:
Reverting to old habits: Some people refinance but continue to use credit cards, ending up with even more debt.
Taking on more than necessary: If a lender requires you to borrow more than your current debt, apply any surplus immediately to your loan.
Extended timelines: Refinancing can stretch out payments, which might reduce monthly costs but could lead to paying more in total interest over time.
Aggressively Paying Down Principal
Paying down the principal early is one of the most effective ways to reduce interest and get out of debt faster. For example:
If you pay more than the required amount on an amortized loan, the extra goes directly to reducing the principal.
This lowers the interest calculated on future payments, accelerating your payoff timeline.
You can combine this strategy with the snowball method—start by eliminating smaller debts, then roll those payments into larger ones. This approach builds momentum and maximizes efficiency.
The Importance of Emergency Savings
Once your debt is manageable, focus on building an emergency fund. Without one, unexpected expenses (like car repairs) can push you back into debt. Even a modest emergency fund can keep your financial plan on track and prevent reliance on credit cards.
Final Thoughts
Debt management isn’t easy, but it’s achievable with a clear plan and disciplined execution. Whether you’re tackling small debts, exploring refinancing options, or aggressively paying down principal, the goal is the same: free up your income to focus on savings and goals.
Remember, this is just one step in your financial journey. Building emergency savings and creating a solid financial plan are next on the list. Stay tuned for a future discussion on emergency funds and other financial strategies.
For more information on financial terms and strategies, check out Investopedia, a great resource for breaking down complex topics into simple, relatable terms.
If you’re ready to have the guidance you need to plan for prosperity, book a call with me. Let’s connect and I’ll show you how to go from chaos to clarity.