Nearly everyone carries some kind of debt, but then, all debt is not created equal. There's good debt (buying a potentially appreciating asset such as a home) and bad debt (taking on excessive consumer debt, such as multiple credit card balances). Paying off credit card balances — at hefty interest rates — will put a strain on your finances if you don't establish a disciplined approach. What's more, increasing consumer debt has a debilitating effect on your overall net worth.
Imagine yourself entering retirement with a nest egg of $1 million. You know that amount will be sufficient to give you the income you need for your annual living expenses. But if you're relying on it as a source for paying off continuing consumer debt, you may be jeopardizing your financial future — as well as compromising the amount you can leave to your heirs.
So, to determine if you need to be concerned about your debt, you first need to be clear about your financial situation. Assess your worth by checking the value of all of your assets (e.g., retirement plans, investments, property), minus the amount of debt you have. Also, review your saving habits. Do you plan for taxes, retirement and other financial goals?
Once you have measured the amount of money coming in versus the amount of money going out, if your debt-to-income ratio is more than 30%, then you should work on eliminating or at least minimizing debt before you retire. First, although you may be able to make payments now without compromising your financial security, once you're no longer earning a salary, those payments may become a considerable burden, draining your retirement resources. And, second, if anything happens to you, that burden may fall on your family.
A good starting point for your debt management plan would be to determine the amount of all of your credit cards and outstanding installment loan balances. Then:
If you're finding it too difficult to manage the amount of your debt on your own, you may benefit from the help of a professional credit counseling service.
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