Debt is neither good nor bad. It's necessary to purchase the things that we need. But how much is too much? We'll discuss ways to trim, deal and consolidate your debt.
The savings rates of Americans living in the US is appalling. In the year 2005 Americans saved on average, a whopping -.5%, according to Charles Schwab. The reason simply is that we're all living beyond our means and are spending and borrowing more than ever. If left unchecked the spiralling debt will increase to a point that will endanger each and every one of financial burden or ruin. The following tips are common sense and easy to apply, starting today. In the very least, you'll get a handle as to what is going on and be able to better deal with the situation.
Examine your cash flow
The very first thing to do is to analyze how much you owe and what percentage of your income is goingto debt instruments. In fact everyone needs to do what banks do when they figure out the amount of money that they lend on mortgages. If your mortgage, house insurance, property taxes and other home debt loans exceeds 28%of your gross income, then you may possibly be living beyond your means, especially if the mortgage or home debt has a floating interest rate that can change. After this analyze all other debt such as credit cards, auto loans, etc. If the total of these, added on to the house debt exceeds 36% of your gross income, then you are in danger . You must analyze what it is your spending on and try to trim spending where possible.
Credit card interest trap
In addition analyze how much interest you're paying on credit cards. Either pay these off first or try to get them lowered by negotiating with your credit card company. Certainly credit cards have become a major problem with everyones financial health. They make purchasing things easy and allows us to live beyond our means. They make the bargains we purchase into very expensive items once interest is factored in. Try to make purchases with cash to avoid using the credit cards if possible. If you're in such debt that paying off the credit card proves to be difficult, try using a home debt instrument, such as a home equity loan or home equity line of credit. The interest rates are lower and interest payed is tax deductable. This loan should be for the short term only to minimize interest payments over the life of the loan. Longer termed loans, although having lower monthly payments, will make you pay a tremendous amount of interest over the life of the loan.
Shop for the best rates
When shopping for mortgages, home equity loans, home equity lines of credit or education loans do your homework! Shop for the best rates available. Decide for your home debt instruments, what type and what length of time suits you best. As a rule of thumb, if you will live in your home longer than 5 to 6 years choose a fixed mortgage product. If you will only live there for a few years, the adjustable rate mortgage or ARM's make more sense. Go either for the shortest loan that you could afford or, if you feel more comfortable, take a traditional 30 year mortgage and start prepaying it to reduce the life of the loan and ultimately the amount of interest that you'll be repaying. Consider a bi-monthly mortgage for even quicker payback of your mortgage. The same advice generally can be used for home equity loans. The home equity line of credit, in my opinion, is best suited for occasional purchases and emergencies. As far as educational loans are concerned, there are many low interest products out there. Also $2500 of interest on these loans can now be deducted, if your income doesn't exceed a certain amount.
In Summary
The bottom line is that you must analyze how much debt you are in, what you can afford and what you can trim off. Pay your debt off as quickly as possible. Consider substituting tax deductible interest loans for credit cards with high non deductible credit card interest. Consider buying things with cash. Finally negotiate or shop around loans for the best rates.
