Keys to a Healthy Debt Diet
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The secret to success when it comes to health and wellness lies in balanced nutrition, a smart regimen, and realistic goals. It’s about building a healthy routine you can live with and stick to, and the same is true when it comes to your financial health.
Paying off debt isn’t just about transferring balances to a 0% interest credit card or rolling the dice at the casino. It takes a balanced approach of viable strategies and earnest consistency to make a lasting, positive impact.
In the spirit of getting financially fit, here are five debt wellness tips to help you shed your debt and live a fiscally healthier life.
Identify and shed your bad debt
Similar to cutting back on unhealthy foods, the first thing you need to do is identify your bad debt and not-so-great spending habits and create a plan to eliminate them. Bad debt is the type that holds you back from achieving your financial goals, such as lingering credit card balances or personal loans. This kind of debt can easily get away from any of us. If you’re spending more than you make or dipping into your savings to pay for the basics, you may end up with unwanted debt.
Depending on your financial situation, you should prioritize paying off your smallest balances first (Snowball Method) or the debt with the highest interest (Avalanche Method). Learn more about both of these debt paydown methods. If you’re not sure where to start, a conversation with a financial advisor can help you form a debt management plan that’s best for you.
Manage the good debt
Like the good type of cholesterol, there is such a thing as “good debt.” One example could be taking out a small business loan to pursue a passion and potentially increase your future income. These types of loans usually carry a lower interest rate that can be tax deductible.
Another common example of good debt is taking on a mortgage to buy a home. Potential benefits include appreciation, which is the change in the value of your home over time, and home equity, which is the difference between the balance on your mortgage and your home’s market value.1 These type of loans also provide another advantage. As you make consistent on-time payments, your credit score should rise. Ultimately, if you are a homeowner with good credit, you’re likely to have debt consolidation options that won’t risk your house2 — all of which are can be explored in detail with a financial advisor.
Save for fiscal fitness
One of the best ways to keep your debt under control is to first put a portion of your expendable monthly income towards paying it down. Once the debt is no longer weighing you down, shift that same amount to grow your rainy-day fund, or long-term investments. However, you can make an exception if your employer offers a 401(k)-match program, which is a benefit you shouldn’t ignore—start with a small contribution and increase when you are more financially comfortable. Once you’ve grown accustomed to your adjusted income, it’s an easy way to increase your cushion without feeling the pinch.
Another great way to stay fiscally fit is to use a budgeting strategy, which can help you stick to your plan and adopt good spending habits. Try to use auto-pay to pay bills, ask your bank to lower your daily credit spending limit, or even leave your credit cards at home and set a cash limit for yourself when you go out.
Splurge responsibly
One key to maintaining financial wellness is to treat yourself every once in a while. You’re only human—take the occasional financial cheat day. A celebratory dinner out, new clothes to start a new job, or a massage to relax can bring balance to your life as long as it doesn’t blow your budget.
One helpful rule of thumb to follow is the 50-30-20 budgeting strategy: 50% on needs, 30% on wants, and 20% allocated toward your savings. Remember, you’re in it for the long haul, so allow yourself the freedom to enjoy some simple pleasures along the way.
Beware of the fads
When you are carrying the burden of debt you may be tempted to try methods that promise fast and easy payoffs. Just as 24-hour juice cleanses, crash diets and miracle workouts can seem like convincing short cuts to a healthy body, get rich quick schemes to boost your bank account are out there, too. Make sure to do research before going in on solutions that seem too-good-to-be-true.
Sometimes fads work, but the reality is that most of the time they simply do not. If you need to supplement your income safely to keep debt at bay, one way is to start a side hustle.
Hopefully, these tips will help you get your finances in healthy shape. If you’d like the added benefit of working with the equivalent of a financial fitness trainer, speak with one of our financial advisors.
Citations:
1 Investopedia: “Homeownership as an Investment” by Jim Probasco, February 21, 2021 https://www.investopedia.com/articles/mortgages-real-estate/08/home-ownership.asp
2 NerdWallet: “Home Equity to Consolidate Debt: Weigh the Pros and Cons” by Jeanne Lee, March 16, 2021 https://www.nerdwallet.com/blog/finance/home-equity-to-consolidate-debt-weigh-the-pros-and-cons/