Debt Reduction - 3 Things To Avoid, 3 Things To Do

Debt Reduction, as with all Financial strategies, needs to be customized to meet each family’s overall financial structure and goals. In order to maximize the impact of efforts to reduce debts, care should be taken to consider the impact on long-term financial goals.

3 Things to Avoid:

Not Considering the Impact of Interest – As the economic climate over the past few years has caused credit to be more difficult to obtain and rates to increase, many families may find significant differences in the interest rates they are paying for different outstanding debts. It is important that all purchasing and payoff decisions consider the impact of interest rates.

Many popular debt reduction strategies suggest paying off outstanding debt with the smallest outstanding balance first, in order to provide the positive psychological impact of removing one outstanding balance right away. I would suggest that managing the overall outstanding debt with an eye to using incremental overall reductions in debt can be just as meaningful, and may provide a more efficient use of the efforts applied to that effort.

Focusing on Mortgage Payoff as an isolated Financial Goal – Paying off any outstanding debt is a worthy goal: Paying off a Mortgage needs to be included in a customized overall Financial strategy. Several factors, such as Income Tax position, Retirement plans, sources of passive income, and overall financial position need to be considered as part of that strategy. A Mortgage is just one part of that picture.

Strict adherence to a “No Use of Credit” policy – In conjunction with the desire to reduce debt, many debt-reduction programs adhere to a strict policy against the use of credit. Every purchasing decision, whether credit is used or not, needs to consider the overall impact to a family’s Financial strategy. If a short-term debt is needed to accomplish a long-term financial goal; strict adherence to a “No Use of Credit” policy may cause a family to develop a scarcity mindset, and prevent the attainment of Financial Freedom.

3 Things to Do:

Consider the cost of Interest with ALL purchases – Unless a family has a lot of spare cash lying around, all purchases are made at the expense of using that money for something else. (This is commonly referred to as an “opportunity cost”.) The decision about which of these purchases uses credit won’t change the overall impact to the family. Yes, use of credit should be avoided; but all spending needs to be considered as part of an overall financial strategy.

Track the monthly cost of Interest – All changes to a family’s financial position should be tracked, but a special focus should be made on the cost of interest, the source of the interest paid, and the impact of the interest on the overall financial plan.

Give Debt-reduction a high-priority in a family’s overall financial plan – Any increases to overall debt should be carefully monitored: Debt Elimination should always be the ultimate goal.

Bottom Line? – You are the author of your Financial Strategy and are always designing your financial future.