By Hirsch Serman, MBA, CPA, Financial Coach
Debt for many has become a way of life. It has flooded our daily lives in many ways and to carry debt has become a “given” for too many people. In fact, according to a USA Today article from February 2020 (https://bit.ly/3h26lrd), the outstanding credit debt and other revolving debt have risen almost 20% from just a decade ago. In addition, the access to credit has become significant easier over time. According to Experian, a leading credit bureau, the average balance on a credit card is now almost $6,200. The average interest for a new credit card of 23.63% for someone with fair credit (according to an April 6, 2020 article by Wallethub.com (https://bit.ly/3kJNOC2). These statistics are from just weeks before the COVID pandemic hit in force and it is expected that the amount of debt the average household carries will increase through the pandemic.
In order to reduce or eliminate your debt, you need to have a plan. While it is not a slam dunk, following these steps will help you tremendously.
1. Understand your spending habits and discretionary spending.
2. Not all debt is equal – list out your debt.
3. Prioritize your debt.
4. Snowball your payments
There are other factors that you may want to speak to a financial coach about that may make an even greater impact in reducing your debt, like handling higher interest debt like credit cards, consolidating debt and more.
1. Understand Your Spending Habits and Discretionary Spending
The way we spend our money changes as our lives change, meaning our spending evolve over time. Unfortunately, most people do not take notice of these changes. I am a big champion of creating a budget. Instead of doing a budget in the traditional manner, list your expenses out in two phases – start with your essential spend to “survive” and follow that with listing out your discretionary spending. This will help you identify your spending habits and where you can reduce spending to attack your debt.
2. Not All Debt Is Equal
Many professionals will tell you that there is healthy and unhealthy debt. However you look at debt, you need to understand what debt you have, the interest rate, the tax implications, the minimum payment, and more. The easiest way to get a visual of your debt is to list it out in a table. It may also be helpful to group the debt by type (i.e. debt related to your home, credit cards, automobiles, student loans, medical bills etc. are together).
3. Prioritize Your Debt
Many people I work with lump all their debt into a single category – debt! By listing your debt out as illustrated above, you are able to see how each debt obligation impacts you. For instance, your home is probably at a relatively low interest rate and you can usually deduct the interest when filing your taxes, making the effective rate even lower. The interest rate on your credit cards may be more than 20% and is not deductible. It becomes quite clear which category should be prioritized to attack first.
4. Snowball Your Payments
Even though it has a strange name, it is a strategy that is proven to have enormous success when it comes to reducing your debt. After you list out your debt, you know your minimum obligation every month. In step 1, we identified discretionary spending that could be used to pay down debt. Take this discretionary amount and pay it towards your smallest balance. Once that balance is paid off, take the entire amount that was being paid toward the smallest balance (the minimum payment due plus the reallocated discretionary spend) and pay it toward the next smallest balance. You have started building momentum to eliminate this debt. You keep rolling or snowballing these payments into the next smallest debt and you will be amazed at how effective this is at eliminating debt.
There are other approaches, considerations, and ideas in how to reduce debt and worthy of exploring. Working with a financial coach can help setup the plan and keep you accountable. The key is having a proven plan and being disciplined in following it.
Hirsch Serman, MBA, CPA is a financial coach and the founder of Lifecycle Financial, a company that helps those going through Divorce and other life cycle changes to navigate the financial pitfalls of a new life dynamic. The company was founded through personal experiences in divorce and watching the changes in an aging parent. He has worked in finance for over 20 years (including financial planning and tax) and has taught on the university level as well as conducted seminars for high school youth on personal finances. Hirsch is a member of the American Association of Daily Money Managers (AADMM).
Tune in to his radio show Tuesdays at 9am CST / 10am EST: www.facebook.com/singlesTalkRadio
INC., KKHT Radio, MomsBlog.com, DivorcedMoms.com, The Divorce Coaching Hour with Christy Stratton, The Memphis Business Journal, The New Southern, and Funding Sage media outlets have all covered his work in Divorce and Hirsch was selected to be a New Orleans Entrepreneur Week Fellow. Hirsch has a passion to serve others and has worked with numerous non-profit boards including the United Way and is a trustee of Texas College. Please reach out with any comments to [email protected].