Debt Management Tips

  • Try to avoid any debt on depreciating assets. Depreciating assets? Cars, junk you buy in the mall, discount stores, etc. Basically, most of what you see out in the world. Only take on debt that provides you the opportunity to purchase an appreciating asset. This includes real estate (rental and personal residence), a business, and a college education.
  • Be wise and careful, even when you take out loans on appreciating assets. You can go bankrupt taking out loans on real estate, businesses, and a college education. Many people have and many people will no matter what their yearly income. Take on debt only as needed and only in reasonable amounts. When in doubt, just say NO.
  • Taking on debt on depreciating assets will deplete your wealth. Yes, I am repeating myself here again because this point is so important. This list is large. Here are a few items: vehicles, clothing, electronics, furniture, and home improvements. These purchases lose value immediately. Buying them on credit will only make the situation worse.
  • Pay off debt on depreciating assets as fast as you can in many cases. This means cutting back on your day-to-day living expenses (eat out less often, buy less “stuff”) and pay off your credit cards, vehicle loans, etc. With that being said, it is wise to understand opportunity cost. There are times it is better to invest your extra money rather than paying down debt when those interest rates are very low.
  • You can use the debt snowball (pay off the smallest loan first and then work upward toward the next smallest), or you can use the debt avalanche (pay off the highest interest loan first and then work your way down to the next highest interest rate loan). The key is to put together a plan and do it through thick and thin! Becoming debt free can be very liberating.
  • Max out your retirement plans before paying off business loans and your mortgage. This includes the 401K/TSP/403b/457 AND your Roth IRA each year. This is $22,500 for the company retirement plan in 2023 (add $7,500 for people age 50 or more) and $6,500 for the Roth IRA in 2023 (add $1,000 for people age 50 or more). Again, opportunity cost can make this a better option than paying extra on the debt.

  • For those of you who are small business owners, you could consider a SEP-IRA, a Simple IRA, or an individual or Small Plan 401(k). It is key to identify the right plan based on your business and your tax burden. These plans can serve you well as you built liquid assets beyond just investing in the business. Learn more about small business plans at Vanguard by going here.

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Stuff the lawyer wants me to say: Investing outside a bank or a credit union is not FDIC insured. You may lose the value in the investments you select. All information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, or other products named. Translated: I am not selling anything! Educate yourself, research the information that you learned and finally make the right decisions that will benefit you and your family going forward.

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