Sponsored Story By: KEMBA Financial Credit Union
If you’re like most Americans, you enjoy buying things and going shopping. While this is great for the economy, if you’re using credit cards and other financing options to fund your purchases, you may experience a sinking feeling when the bills start coming. Whether you are living within your means or have overextended yourself financially, a debt reduction plan is one way to put your income to work, pay less interest and see your balances start to shrink.
Now is a great time to refocus and evaluate your finances to help overcome any financial challenges you may be experiencing. If 2020 taught us anything, it was to be prepared for the unexpected. Resolving to pay down your credit balances will put you in a position to tackle any unforeseen economic uncertainty in the future and put you on a path to reach your financial goals.
Set Some Long-Term Goals
If you don’t know what you’re working toward, it’s hard to stay on track. Reducing your debt is a lot harder than spending the money that created those high balances and monthly payments. Create some short and long-term financial goals that you can use to motivate you throughout the process. Maybe it is buying your first house, creating a 529 plan for your kids’ college, upgrading your old college car, or just simply having the ability to enjoy the money you make without the stress and burden of carrying a high credit card balance. These goals will give you purpose and help you refocus when you get stressed during your journey to financial peace of mind.
Create a Budget
If you want to reduce your debt, it’s crucial to understand what you have to work with, which is what a budget will provide. Creating a budget helps you compare your monthly income to the bills and expenses you pay every month. A budget tells you how much money you have left after you pay for your obligations - home, utilities, food, insurance, etc. The total remaining after subtracting your obligations from your income is called your disposable income, which is one of your best tools for reducing your debt. This is the money you have available to spend on extra items throughout the month.
Refinance, Consolidate, Transfer
Another aspect to consider when evaluating your debt, is the cost of your current debts. Yes – it costs money to have debt! The cost of debt is your interest rate, and a higher the interest rate is more ‘expensive’ than a lower rate. Review each of your liabilities and determine if there is a less expensive way to finance them. For example, review the interest rates on your credit card(s), and find a credit card that can offer a lower rate. KEMBA (as of April 2021) currently offers 0% interest on balance transfers for 12 months, which means you can consolidate your debts into one balance, potentially lower your monthly payment and watch your balance shrink more quickly.
You can also review your current mortgage, auto loan and student loan rates to see if refinancing will lower those payments, helping you pay them off more quickly. By refinancing and consolidating your debt, you are reducing the ‘expense’ and creating more disposable income.
Tackle Your Debt One Account at a Time
Once you have evaluated and hopefully consolidated or refinanced your debt, you can use your disposable income to pay it off more quickly. Since credit cards typically the most expensive, (higher rates + monthly revolving balances) start with those first. Find the smallest balance and add some additional money from your disposable income to your minimum payment each month until that balance is paid off. After that account has a zero balance, take what you were paying on that account and add that to the minimum payment of your next target account. Once you have your credit card balances paid off, move on to your auto loan or student loan and continue the process of paying the larger payment to those accounts, which will help you pay down your balances more quickly.
Don’t Get Discouraged
Anyone who has gone through this type of debt reduction strategy will tell you that it’s not an easy process. Following through with your plan will be a little painful because it may require short-term sacrifices to meet your long-term financial goals. You may have to say no to eating out, skip retail therapy with friends, or live with an old coffee maker instead of buying coffee in the morning. The key to healthy personal finances is budgeting your money, buying things your budget allows, saving for big purchases, and being smart about how you use credit to finance purchases. Always keep your long-term goals in mind.
Ask for Help
If you are reading this and feel overwhelmed because you feel like you are drowning, you need to ask for help from a trusted partner who has your best interest in mind. KEMBA offers financial counseling services for members and can help evaluate your current situation. Our award-winning member service team can help you create a unique plan that may help you meet your short and long-term goals, consolidate debt, lower payments and get your personal finances back on track. We have helped Central Ohioans create a plan in place to save money, reduce payments and help achieve their financial goals. If you aren’t a member yet, join today and see why KEMBA is a better way to bank. To learn more, call us at 614.235.2395, option 4, or visit one of our ten local branches.