getting out of debt

Getting Out of Debt: A Roadmap to Financial Freedom
Personal debt can trap you in a costly cycle. High interest rates on credit cards, loans, and other debts inflate your balance, draining income and delaying goals like homeownership, retirement, or wealth-building. For example, a $10,000 credit card balance at 20% interest could balloon to over $20,000 if you only make minimum payments, stretching years. Debt also brings stress, limits financial freedom, and can hurt your credit score, raising future borrowing costs and wrecking retirement. Escaping requires a clear plan—here’s how.

1. Create a Budget to Take Control
A solid budget is your starting point. Track income and expenses to spot leaks. Use the 50/30/20 rule: 50% for necessities (housing, food), 30% for wants, and 20% for savings and debt repayment. Cut non-essentials—like dining out or unused subscriptions—and redirect that money to debt. Apps can help you stay disciplined. Review your budget at least weekly to adjust.

2. The Risks of Credit Cards and High Interest
Credit cards are convenient but dangerous if mismanaged. Their high interest rates—often 15-25% or more—make balances grow fast. For instance, a $5,000 balance at 22% interest accrues about $1,100 in interest yearly if unpaid. Minimum payments barely dent the principal, trapping you in a long-term debt spiral. Late payments add fees and can spike rates even higher, while maxed-out cards hurt your credit score. To mitigate risks, pay balances in full monthly, avoid impulse purchases, and never rely on cards for daily expenses.
When you use a credit card, deduct that amount like a check or debit card purchase you have spent, when the credit card bill is due you have already set back the money.

3. Lower Interest Rates to Save Money
High rates accelerate debt growth. Call creditors to negotiate lower rates—many will work with you if you’re proactive. If that doesn’t pan out, transfer credit card balances to a 0% introductory APR card (watch for transfer fees). For larger debts, consider personal loans with lower rates. Always read terms to avoid hidden costs.

4. Debt Consolidation Loans for Simplicity
Managing multiple debts? A debt consolidation loan combines them into one payment, often at a lower rate. This simplifies tracking and can reduce monthly costs. Shop around at banks, credit unions, or online lenders, but ensure the loan term doesn’t extend so long you pay more interest overall. Use consolidation to pay off debt faster, not to accrue new debt.
Be sure you have borrowing and credit cards under control or a debt consolidation loan can make it easier to just add on more debt.

5. The Debt Snowball Method for Momentum
The debt snowball method, tackles your smallest debt first while paying minimums on others. Once cleared, roll that payment into the next smallest debt, gaining momentum. This delivers quick wins to stay motivated. Alternatively, the debt avalanche method—targeting high-interest debt first—saves more on interest but may feel slower. Choose what suits you.

6. The Value and Dangers of Working with a Debt Coach or Financial Advisor
A debt coach or financial advisor can be a game-changer, offering personalized strategies, accountability, and expertise. They can help you craft a debt repayment plan, negotiate with creditors, or optimize your budget, often saving you years of time and many thousands in money. The right money coach or advisor can help you avoid pitfalls and plan for long-term goals like retirement.
Personal Finance is more about Personal and less about the Financial. There can be a lot of emotion tied to debt and spending. Couples may have to work out spending issues and financial goals in their marriage. A good debt coach can help you work through real world issues and help you find agreement in your finances and financial goals.
However, there are risks. Some “coaches” lack proper credentials and may push expensive services or debt settlement schemes that hurt your credit or cost more than they save. Always vet advisors—check certifications, ask about fees (hourly vs. commission-based), and avoid anyone promising quick fixes. Research thoroughly, most offer a free first visit. Try before you buy.

7. The Value of Debt-Free Retirement (and Handling Debt in Retirement)
Entering retirement debt-free is transformative. Without debt payments, your savings and fixed income (Social Security, pensions) go further, funding healthcare, travel, hobbies, or emergencies. Debt in retirement, however, is a burden. Fixed incomes struggle to cover payments, and high-interest debt can deplete savings. For example, a $20,000 loan at 15% could eat a huge chunk of retirement funds if unpaid. That would be $3,000 a year that couldn’t go to today’s living, bills and expenses, it has to pay yesterday’s living, bills and expenses.

• Before Retirement: Prioritize clearing high-interest debt and avoid new loans. Increase retirement contributions once debt is under control.
  
• During Retirement: If debt lingers, consider downsizing or using low-risk investments to pay it off. Avoid tapping retirement accounts, as withdrawals usually trigger taxes, deplete your retirement account and could cost you early withdrawal penalties. A credit counselor familiar with retirement can offer tailored solutions if debt feels unmanageable. You may be eligible for benefits you are not aware of or you may be eligible for debt programs that you don’t know about.
  

Final Thoughts
Debt freedom, especially before retirement, brings peace and possibility. Understand debt’s steep costs—especially credit cards’ high interest—then build a budget, lower rates, consolidate wisely, and use the snowball method. Clear debt before retirement to secure your future; manage it carefully in retirement to protect savings. Stay focused, avoid new debt, and celebrate progress. Your financial freedom is closer than you think—start today!
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Eastbrook Financial Services Staff