Debt Management Tips

Nothing can derail your retirement plans like excessive debt. Debt works against you as hard as you are working to achieve your retirement dreams. Debt also works against you while you sleep, while you are on vacation and even on weekends.

Einstein has been credited with saying that the most powerful thing he has ever encountered is compound interest. Carrying debt turns this powerful force against you. Why make it harder than it needs to be?

Debt can sometimes be a necessary evil, but it is important to understand how to control it, especially approaching and during retirement. Don't let debt work against you.

Debt: Your Retirement's Enemy

For example: If you have invested wisely and are getting a 6% annual return on you investment (which is great in this market) but carry a credit card balance that charges a 13% interest rate, you are losing the interest battle.

If you instead take the money you are investing and pay off your cards, you would more than double your return! This is why the saying goes, "Rich people lend money, poor people borrow money".

Debt will crush your best attempts to be financially secure when you retire. Your biggest return on your money will come from paying off high interest debt. This should be the number one priority on your list.

Pay Off Your Debt

If you are in debt and need to get out, there is a way to do it efficiently. The most important variable involved is time. The quicker you pay it off, the quicker you will become financially secure.

There is a process to paying off your debts that will ensure you do it quickly and efficiently.

Once you have eliminated your debt, it is important to change the way have used debt. After all, there was a reason why you were in debt. Bad habits.

You now need to learn how to live debt free, changing the way you spend money. If you are approaching retirement, now is the time to create good habits. You cannot afford to have debt when you are retired. Living without debt will keep interest payments from eroding your savings away. Learn about how to live debt free.

When Debt is Good

Financially speaking, debt can sometimes be a good thing. I use the term "financially speaking" to indicate that there is nothing else taken into account, such as your peace of mind or risk appetite.

In financial terms, debt can be good if it carries a smaller rate than you are able to earn through your investments. For Example:

If you refinanced your mortgage in 2005 at 5%, you may not want to pay it off early if you can earn 8% on your money through an investment. Each of those dollars is netting 3% by not going toward paying off your mortgage early.

From a strictly financial perspective, it doesn't make sense to pay off debt under the above circumstance. however, there are other factors you need to consider before deciding whether or not to pay off the debt - like your peace of mind.

Peace of mind carries a price tag. How much is yours worth?

It is important to take your peace of mind into account when you decide whether or not to pay off this "good debt". You need to decide how comfortable you are with carrying debt.

If you don't like the idea of being indebted to anyone, or if you love the idea of begin completely debt free, it may be wise to pay off your debt even if you can earn a better rate elsewhere.

There is no better feeling than being debt free. It is like a weight begin lifted from your shoulders. Even if there is a financial advantage to not paying off debt, as we discussed above, you may choose to pay it off anyway, for the sake of your peace of mind.

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