Create a plan to tackle debt
Let’s talk about how to celebrate National Financial Planning Month (October), which is intended to “remind us to keep our spending in check and prepare our budgets.”
From my perspective as a money manager and a promoter of financial literacy education, debt is sometimes necessary (helping pay for an education that leads to a well-suited career), sometimes vital (helping you buy a house for your family), and sometimes, nothing but harmful (supporting overconsumption).
Financial planning for student loans involves staying on top of things. For example, you need to know that payments on eligible federal student loans, which have been suspended since March 2020, will resume after Jan. 31, 2022. For more on that subject, see tinyurl.com/sv8bxc6s.
How to pay off student loans is another planning point. Studentaid.gov offers a Loan Simulator to help you examine possible payment plans, as well as an income-driven repayment plan. Fidelity Investments also offers a free student debt tool (tinyurl.com/2mvjdkxf ) to help examine ways to pay off your student loan.
If you are borrowing money to accumulate more stuff than you need, is there any planning that you can do? The first step is to do a self-assessment — to identify problems to solve.
Problem one: Reconsider spending habits. Solution: Buy only what you can afford without taking on debt.
Problem two: Uncertain of interest charges. Solution: Review the interest rates charged by your creditors. And if they are high, plan on finding lower options.
High-interest debt often involves the use (or overuse) of credit cards. Some credit cards are more “expensive” than others when it comes to interest rates. A recent survey by CreditCards.com (tinyurl.com/2nu8ud39) found that the highest retail store credit card annual percentage rate (APR) was 29.9 percent, with the average retail credit card APR at 24.35 percent and the average non-retail card at 19.92 percent APR.
As FINRA advises, “Few money-management strategies pay off as well as, or with less risk than, paying off all high interest debt you may have” (tinyurl.com/ yx2rssw5). (FINRA, the Financial Industry Regulatory Authority, regulates the brokerage industry.)
When planning for the future, don’t leave out other uses for the money you are using to cover debt payments. Think ahead to retirement. For example, if you are paying off a credit card with a $10,000 balance and 18 percent interest, Steven D. Brett, a partner at Marcum Wealth LLC, points out: “By getting rid of those interest payments, you’re effectively getting an 18 percent return on your money. That means your money would generally need to earn an after-tax return greater than 18 percent to make investing a smarter choice than paying off debt.” For more on this topic, see “Pay Down Debt or Save for Retirement?” (tinyurl.com/ybf3tpfk).
As to mortgages, this interest rate market offers a number of low-interest rate options. The goal is to do your research and find the best options for financing or refinancing. Here is a tool for further research from the Consumer Financial Protection Bureau: tinyurl.com/2xtbfncw.
With any discussion of debt, good or bad, the starting point must be a thorough understanding of your personal financial situation. FINRA provides a form for calculating your monthly income and expenses at tinyurl.com/5f2vrza3.
Take on October with a view to creating a plan by the end of the month. When you celebrate Halloween, remember that debt doesn’t have to be scary.
If you have an interest in promoting financial literacy education, you can help get the word out about a financial literacy competition that I sponsor. Reach out to your social media connections with #401kChampion.
There is still time for 401(k) participants to compete for the 401(k) Champion Award, which encourages 401(k) participants to share their knowledge of 401(k)s with each other. To compete for the award, go to 401kchampion.com.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2020 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.