By Allison Videtti
Debt, in some form or another, is a part of being an adult these days. Want to go to college? Most of us need to take out a loan. How about buying a car? You’ll probably want loan for that, too. Interested in being a homeowner one day? You’ll need to plunk that credit card down to build up your credit score.
While debt gets a bad rap, it’s not all bad. What matters is how you manage your debt, not what specific debt you have. Here are a few tips that can put you in control of your finances and manage your debt like a pro.
Set a detailed budget. Putting together a budget is the first step to managing your debt. Between rent, utilities, car payments, groceries, and all of life’s other necessities, it’s important to know what you can really afford to spend each month. Review your last six months (or so) of paychecks and your bank/credit card statements. Did you spend less than you earned? Did you put money in savings? If the answer to each of these questions is “no,” it’s time to make some changes and cut your expenses.
Or use 50/30/20 plan. While you can allot specific amounts to certain areas of your budget ($200/month for groceries, $75/month for gas, etc.), you can also try a more general budgeting technique that many people find less overwhelming: the 50/30/20 rule. A full 50 percent of your budget should go to “needs,” such as groceries, housing and utilities. Thirty percent can go for “wants,” like new threads, a huge data plan and fancy iced coffee. The final 20 percent, meanwhile, goes straight to your savings account.
Adding to your savings is an important piece of the puzzle. If you don’t have an emergency fund built up, every time you run into trouble – hello, car repairs – you’ll wind up charging it on your credit card. When you do that, you run the risk of amassing debt you can’t handle.
Pay off your credit card in full each month. You’ve probably heard this a million times, but there’s a reason for that – it’s really the easiest way to control your credit card debt. If you carry over your balance from month to month, you pay compound interest. That means that if you have $500 in credit card debt and you pay it off over 2 years at $25 per month, you’ll wind up paying $91 in interest, or nearly $600 for an item that you purchased for $500. Do you really want to overpay for a month’s worth of takeout, groceries and gasoline over the course of two years?
To keep your credit card debt from ballooning, use your credit card as you would a debit card. Track your credit card purchases using an app (like the Alliant Mobile Banking app), or record them in a check register or a notebook at the end of each day. Set a budget and stick to it – just because you CAN buy it on credit doesn’t mean you SHOULD.
Consolidate your student loans. If you have multiple private student loans, you may want to consider consolidating them into one single loan. Many lenders offer private student loan consolidation. You’ll have only one lender to pay, making it easier to keep track of your due dates and avoid late or missed payments. And, you may be able to get a lower interest rate and save money (though this depends on your credit score).
Keep in mind that you can’t consolidate private and federal student loans together. However, if you have multiple federal student loans, you can consolidate them into one loan by applying for a Direct Consolidation Loan through StudentLoans.gov.
So, here’s some good news: managing debt isn’t rocket science (yay!). The bad news? It does require some work.
Every few months, do a debt check-up to see where you stand. The experts at ClearPoint Credit Counseling Solutions (CCCS) suggest that if you don’t have a mortgage, your debt should be less than 15 percent of your income (so, if you make $35,000/year, you should have less than $5,250 in debt). Other experts swear by the less than 30 percent utilization rule when it comes to how much of your credit card limit you should be using.
Whatever debt-to-income level you decide you are comfortable with, know that your decisions now will affect your future self. That’s super tough to plan for, because, of course, going out to a great restaurant feels better this week than cooking pasta at home. But, if you can, try to think about your 30-something self who wants to buy a place. How great will it feel to get the keys to your very own home? Pretty darn great.
Allison Videtti regularly blogs for Alliant Credit Union.