In a game of word association, what comes to mind when you hear the word debt? Anxiety? Worry? Stress? If you blurted out any of these responses, you’re not alone. One thing most Americans have in common is that they carry some form of debt. According to recent research, the overwhelming majority of Americans owe money. The Federal Reserve estimates the average American household is saddled with nearly $137,000 in debt. And owing all that money—even though it’s common and often unavoidable—makes many people feel uneasy. The good news is that taking control of your or your family’s debt is achievable. Here’s what you should know as you get started.
Not All Debt Is Bad
Maybe you’ve heard there is both “good” debt and “bad” debt. But what’s the difference between them? Think of debt in these simple terms:
- Good debt is an asset that is expected to increase in value relevant to the funds that were borrowed to pay for it. Examples of good debt include a home or other real estate assets.
- Bad debt is an asset that loses value after its purchase. Often, it involves discretionary spending that brings short-term happiness but comes with long-term payments. Examples of bad debt include a new flat-screen TV or a vacation paid for on a credit card.
Knowing the nature of your debt—and whether it can be classified as good or bad—is a great first step toward getting a handle on it.
Figure Out What You Owe
Your debt is what it is. Beating yourself up about how you accumulated it does you no good. Instead, focus your energy on what you can do today to get it under control. Resolve to determine how much you owe, to whom you owe, and by when you need to pay it off. There are several easy ways to chart your debt obligations. You can do it with a few clicks of your mouse in one of many popular online software programs, through an app on your smartphone, or even the good old-fashioned way: with a pencil and notepad. Whichever way you decide to chart it, this critical first step will get you organized and set you in the right frame of mind for your debt-management journey.
Create a Game Plan for Paying It Down
There are several tried-and-true strategies for tackling debt, but the foundation for all of them remains the same: have a plan! A systematic plan will help you stay accountable, disciplined, and confident throughout the debt-reduction process.
Tip: If you’re not sure where to begin, help is available. Take advantage of the information available at Justice.gov.
Some tactics you may want to work into your plan include:
- Paying more than the minimum monthly payment on your credit cards
- Reducing your spending on nonessential items
- Paying off accounts with the lowest balances first
- Arranging for automatic payments to be made from your bank account
Track Your Progress
Okay, you’ve calculated what you owe, and you have a plan. Now, as you begin to put your plan into action, it is critical to track your progress. Making headway toward financial freedom—even in small increments—can give you the boost you need to keep forging ahead. As each balance gets paid off and your debt begins to subside, maintain your momentum. Consider diverting payments to another source of debt or increasing your 401(k) or IRA contribution with your newly freed-up money.
Building Confidence in Your Debt-Free Future
There’s no question that debt can affect how we feel about our ability to make our dreams for the future a reality. Research indicates that a worker’s confidence in being financially prepared for retirement is correlated directly to his or her level of debt. But don’t be discouraged. With a solid plan and some help, getting the upper hand on your debt is a target well within your reach.
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