Debt Reduction

Nearly everyone carries some kind of debt, but then, all debt is not created equal. There's good debt (buying an appreciating asset such as a home) and bad debt (taking on excessive consumer debt, such as multiple credit card balances). Paying off credit card balances — at hefty interest rates —  will put a strain on your finances if you don't establish a disciplined approach. What's more, increasing consumer debt has a debilitating effect on your overall net worth.

Imagine yourself entering retirement with a comfortable nest egg of $1 million. You know that amount will be sufficient to give you the income you need for your annual living expenses. But if you're relying on it as a source for paying off continuing consumer debt, you may be jeopardizing your financial future — as well as compromising the amount you can leave to your heirs.

So, to determine if you need to be concerned about your debt, you first need to be clear about your financial situation. Assess your worth by checking the value of all of your assets (e.g., retirement plans, investments, property), minus the amount of debt you have. Also, review your saving habits. Do you plan for taxes, retirement and other financial goals?

Once you have measured the amount of money coming in versus the amount of money going out, if your debt-to-income ratio is more than 30%, then you should work on eliminating or at least minimizing debt before you retire. First, although you may be able to make payments now without compromising your financial security, once you're no longer earning a salary, those payments may become a considerable burden, draining your retirement resources. And, second, if anything happens to you, that burden falls on your family.

Start Managing Your Debt

A good starting point for your debt management plan would be to determine the amount of all of your credit cards and outstanding installment loan balances. Then:

  • Pay off the cards with the highest rates first.
  • Make the minimum payment on all but the highest interest rate debt and pay all of the rest on the highest rate account.
  • When that debt is liquidated, do the same with the next account and so on until you are free of consumer debt and other obligations that are not "good debt."

Additional Debt Management Strategies

  • Roll over your credit card balances to a new card with a lower interest rate.  Make sure you read the fine print on the offer. 
  • Limit your credit card use to emergencies only, until your balance is repaid.
  • Use cash and debit cards rather than a credit card.
  • Use only a credit card that requires you to pay the full balance each month.
  • Use only two cards: one that is a debit card or that requires full payment each month and one that allows you to carry a balance for use when you may be traveling or for an emergency.

Goals to Consider

  • Improve cash flow by lowering the amount you have to pay each month.
  • Save or invest money previously paid out in loan interest.
  • Repair your credit rating over time by being able to consistently repay more manageable payments.
  • Improve your overall image to other lenders by showing a stronger financial profile.

If you're finding it too difficult to manage the amount of your debt on your own, you may benefit from the help of a professional credit counseling service.

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© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017