Planning Finance After 50 – Why Repayment Of Debt Early Is Important
Usually, most of us, borrow money or take loan to meet our Urgent needs, which may not be possible to procure with our own savings or the money available with us at that time. This loan/ Debt is used by many corporations and individuals, as a method of making large purchases they could not afford under normal circumstances.
What Is A DEBT : —
A Debt or loan can be something, usually money, owed by one party
( The borrower or debtor ), to a second party ( the lender or creditor). Debt is a deferred payment , or a series of payments, that is owed in the future, which is what differentiates it from an immediate purchase.
Debt is a double -edged sword. Borrow wisely and you may create the opportunity to build equity – for instance in a house, or may be even in yourself, with an education. But rack up too much Debt, and financial distress could be around the corner. Like many Americans, who own a home were able to do so, thanks to a mortgage. Many college Graduates got their degree thanks to a student loan.
But too much Debt can lead to financial distress and may lead to foreclosure on your home or repossession of your car and may result in low credit score, which can lead to high interest rates and difficulty in borrowing in future.
So, to avoid bogged down by Debt, know the details of your income and expenses before borrowing. Think carefully about how much Debt your monthly budget can reasonably accommodate.
Types Of DEBT : —
There may be many different types of consumer Debts. The most common Debt can be :-
— Credit Card Debts
— Student Loan Debt
— Personal Loans/ Debts
— Auto Loans
— Medical Debts
— Utility Bills, Bank Overdraft Charges etc.
— Home Loan/ Mortgage Debt etc., to name a few.
Which Debt Should Be Paid Off First : —
Cut down the credit card or ditch the student plan ? Knock off the house equity line or get a jump in the car loan ? Paying off money you owe is always better- but ditching some Debts will benefit you far more than erasing others. The Debts can be categorized as “ Good Debts” and “ Bad Debts “.
GOOD Debts : — Money you borrow for a home or an education is considered “ Good Debt “. Some home and student loan/ Debts may be Tax- deductible. There is no need to put pressure on yourself to repay these loans as long as you can continue making regular installment payments. But these are also to be cleared before your retirement, better in your 50’s. And not carry them farther.
BAD Debts : — These include anything that doesn’t improve your financial position and that you can’t pay far in full within a month or two. Bad Debt is usually in the form of credit cards Debt or a personal bank loan. You should tackle Bad debt first.
How To Get Out Of Debt Of Your Own : —
It is always advisable to get out of Debt/ loan at the earliest. The Bad Debts must be paid off by the age of 50- 55 years and all other loans,
including home loan, should be re-payed before you retire so that your retirement life is comfortable. To get out of Debt/ loans of your own and that too fast, the following Important steps will be of great help ; —
1 You must confront your Debt by calculating your Debt ratio. Debt ratio can be defined as the amount of total Debt ( excluding mortgages- which is considered a Good Debt as its payment is tax deductible ) as a percentage of gross annual income.
Example – You earn $50,000 a year and you have $25,000 in debt; your Debt Ratio = 0.50
Example – You earn $100,000 a year and have $250,000 in Debt; your Debt Ratio = 2.50
2.Permanently change the behavior that got you into Debt
- You must make enough money to repay the Debt.
Follow These Easy Steps To Set Up A Debt Repayment Plan : —
To repay the loan early and that too with your own resources, the plan should consist of the following steps : —
- Make a list of your Debts. First, you need to make a list of all your loans and borrowings, whether good or Bad..
- Rank your Debts. This is based on the rate of Interest the Debt carries.
- Find extra money to pay your Debts. In this regard your monthly Budget would be of great help.
- Focus on One Debt at a time. The highest interest carrying loan/ Debt must be paid First.
- Move on to the Next Debt on your list. Bad Debt must be cleared First
- Build up your Savings. This is required to repay the Debt of your own, with your own resources.
Rank your Debts and Prioritize Their Repayment : —
From a financial perspective, it’s smart to pay off your highest rate Bad Debt first. For example, putting $500 towards a $3,000 credit card bill with an 18 percent interest rate will save you far more than paying off a $500 bill at 6 percent.
Further, if you’re planning to buy a home or a car in the near future, it may be worth paying down any credit cards that are near their credit limits as it will have a positive impact on your Credit Score and may qualify you for lower interest rates.
Conclusions : —
Regardless of how you deal with paying off your Debts, you’re in real danger of falling back into old habits. It becomes a chronic problem with some, that starts to interfere with other aspects of their lives and can lead to problems at work and with family and friends. It is always better and advisable to resist the temptation of making the purchasing on credit, especially of utility articles which are not that Urgent. Further, never buy anything on credit that depreciates in value like meals out, clothing, furniture and even cars. Borrow money only for sound investments- education, real estate, or your own business etc.
.