Debt Management - Tips for Young Professionals

As a young professional, you're probably excited about the future and all the possibilities it holds. If you have clicked on this post, you know the importance of getting your finances in order and may be worried about your personal debt.

Great News! You have already taken the first step in the process. As you know, debt can be a major obstacle to financial success. It can keep you from saving and restrict your monthly budget. It is no secret that this can also lead to stress and anxiety.

Rest assured, it is possible to manage your debt and get out of debt. It may take some time. There is effort involved. And you have to be disciplined and stick to your plan, but it's worth it. In this blog post, we'll cover some tips on how to manage debt, get out of debt, and the importance of being debt free.

Here are some tips on how to manage your debt:

• Create a budget. I have talked in previous blog posts about the importance of creating a budget. The largest contributor to your debt repayment is your income. So, this is where you should start. Tracking your income and expenses will give you a better understanding of what your obligations are and how to make decisions about your future.
• Plan how you will pay off your debt. There are 2 parts to this:
  1. Take it one step at a time – The debt repayment process is overwhelming and is cause of a lot of anxiety and stress. Try to break it down to smaller pieces and chip away at it. Remember, It’s the Little Things.
  2. Decide which debts to pay off first – You have probably heard people suggest paying off high-interest debt first. By focusing on paying off debts with higher interest rates such as credit cards or personal loans, you can save the money you would have spent on the interest for those debts – This tends to be a very cost-efficient strategy.
  3. Decide how to pay those debts – The “where will those payments come from” – This can be reallocated savings or other investments that are repurposed to make dents in your obligations, or it can be your income. Like I mentioned before, your income is a powerful tool to use to your advantage. And because you have made your budget (Right? You have made your budget, right?), you will know how much you have at your disposal.
• Continue making your payments on time. This is critical. Anyone who has been involved in anything having to do with the credit industry knows the importance of a good payment history. It is crucial to continue making each of your required monthly payments regardless of which particular debt you are trying to tackle and pay off first.
• Keep your Cash Reserves. There is a common misconception that you should throw everything you have at your debt to get it down. However, it is important to keep an emergency fund for unforeseen circumstances. The last thing you want to happen is to run out of reserves and fall deeper into the hole. Funding 3-6 months of your expenses is a good place to start, but you can always save more if it makes you feel more secure.
• Consult with your Financial Advisor. Your financial advisor should have an idea of what your debt obligations are and can help you come up with a plan to reduce your liability while maintaining your savings and investments. Paying down your debt is all about strategy and for me, as a financial advisor, there are few things I like more than a well-crafted strategy – Advisors love solving problems and are eager to help you no matter what your financial situation is.

Here are some tips on how to eliminate your debt:

• Make a plan. Just like making a budget, your plan is going to be your best friend! This plan should include your goals, your budget, and your timeline for getting out of debt. Some people benefit from having a checklist which an advisor or credit counselor can help you with. So, here are a few quick ideas:
  • Create a Timeline – Timeline is going to be super important to getting out of debt, especially if you are dealing with multiple obligations at one time. Some may have shorter terms than other. Figuring out the most efficient and cost-effective way to reduce your debts on a calendar basis can really make a difference.
  • Adjust you Budget – Your budget may need some tweaking depending on how you have been managing your debt so far. Be aware that you may have to sacrifice to get out of the hole, but it will be worth it in the long run.
  • Make note of debt forgiveness programs. If you are someone who qualifies for something like this, it may be worth investigating, especially for those in the medical field. This is not something to count on and may require complicated application processes but can help you determine your future plans. Advisors keep up with several of these options and can help you do research on programs that are applicable to your situation.
  • Check with your HR department to see if your company offers student loan repayment assistance programs in lieu of a retirement plan. Although these programs are not common, it is becoming more and more popular. Your company is devoted to your financial welling being and may offer some additional assistance in this area.
• Make additional payments. Many in the industry will call this the “debt snowball” referring to the cascading balances of your debts. While you continue to make the minimum monthly payments on low-interest debts like your car, house, or student loans, make extra payments on those higher-interest debts I mentioned earlier. Doing this each month will help you pay off your debt faster.
• Reward Yourself. You have to love good ole’ self-motivation, right? In a world of instant gratification, it can be difficult to have patience. Rewarding yourself for meeting longer-term goals can help keep track of your progress and be excited to see yourself making headway.
• Be patient. Getting out of debt takes time and effort. Don't get discouraged if you don't see results immediately. It is just like going to the gym or weightlifting. My friends that go to the gym consistently will tell you that there is no shortcut; there is no quick way to get in shape. Staying consistent and being diligent is the best way to make progress on your workout goals. The same is true for eliminating debt. Just keep at it and you will reach your goals.
• Don't give up. There will be times when you want to give up. Remember why you started this journey in the first place and keep going.

Now for some of the more frequently asked questions surrounding debt.

First, let’s address longer-term debt such as a mortgage. If you are in a position to pay off those larger obligations, I always think that there are benefits. You can save more money and not have to worry about payments. You also may have less stress about a major obligation.

You have read about getting out of debt and how much of a burden it is and how overwhelming it is and so on. You may be asking yourself how you are supposed to get by in life without going into debt for anything. And to that end, another common question is:

Is all debt bad?

Exploring this is more complicated. Yes, debt can allow you to own a home, have a college degree or complete other post-secondary education, purchase transportation for you and your family, and many other things. All this and you are building credit along the way. At the end of the day, most of us at one point or another may be required to go into some level of debt to achieve some of our dreams – Owning a home, starting a small business, etc...

This is where debt management becomes the key to your success. There is a quote by my great grandfather that I have up on the home page of my website that rings true for all areas of life but can be specifically applied to personal finance:

These are the critical tools for life: Character, Ability, Dedication, and Education

Each of these qualities really sum up how you deal with this responsibility – how you treat what you have been given – and how you move forward.

We discuss credit at another time, but this plays a major role in your financial wellbeing. Using credit wisely can be difficult and is sometimes made more complicated than it should be – but it is manageable, especially with the right resources. Tread lightly as it is a slippery slope, but a comprehensive debt management strategy will help you stay on top of your obligations and make progress towards your financial goals.

So, no, not all debt is bad. Yes, debt is a major issue and is a major contributor to your financial wellbeing if you are not careful. But like I said, it may be an inevitable part of living your life.

Consider the benefits and measure the costs. This will set you on the right path. Managing your debt through the tools provided above and making plans to free yourself from those obligations is a worthwhile venture. Doing it on your own can be hard. That is why financial advisors have a wealth of knowledge at their disposal, so please do not hesitate to reach out. I know you have lots of questions and the fact that you are reading this blog posts indicates that you have some degree of interest in this topic for you or for a loved one. If you want someone to answer your questions, give a second look at your situation, or just need some help building out your strategy, I would love to help you figure out what works best for you.

All the Best,

Gil

Any opinions are those of Gil Brandon and not necessarily those of Raymond James.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.