Debt Management

  • Only take on debt that provides you the opportunity to purchase an appreciating asset. This includes real estate (including your personal residence), a business, and a college education.

 

  • Be wise and careful even when you take out loans on appreciating assets. You can go bankrupt taking out loans on real estate, businesses and a college education. Many have and many will. Take on debt only as needed and only in reasonable amounts.

 

  • Do not take out debt on depreciating assets. This list is large. Here are a few: vehicles, clothing, electronics, furniture, home maintenance and improvements, and finally, meals and vacations. These consumable items lose value immediately. Buying them on credit will only make the situation worse.

 

  • Pay off debt on depreciating assets as fast as you can. This means cutting back on your day-to-day living expenses (eat out less often, buy less “stuff”) and pay off your credit cards, vehicle loans, etc.

 

  • However you pay down debt, just do it! You can use the debt snowball(pay off the smallest loan first and then work upward toward the next smallest until you hit the biggest) or you can use the debt avalanche (pay off the highest interest loan first and then work your way down to the next highest interest rate loan until you end up with the lowest interest rate loan). The key is to put together a plan and do it through thick and thin! Becoming debt free can be very liberating.

 

  • Max out your retirement plans before paying off business loans and your mortgage. This includes the 401K/TSP/403b/457 AND your Roth IRA each year. This is $18,500 for the company retirement plan in 2015 (add $5,500 for people age 50 or more) and $5,500 for the Roth IRA in 2015 (add $1,000 for people age 50 or more).

 

  • When you have maxed out your retirement plans you must decide whether you can earn a higher return in a good investment outside of your retirement plans or by paying off those business and real estate loans. Feed your extra money into the account with the highest interest rate. Generally speaking, if your business or real estate loan is below 4% I would encourage you to take your extra money and invest in no-load index mutual funds at Vanguard. Go to the investing page to learn more.