KEYS TO DEBT MANAGMENT

Neal A. Deutsch, CFP^®

Published in Rivertown Journal, August 2006

Debt can be a valuable and useful component of an individual’s finances, if used efficiently and in moderation. For many individuals debt is a necessity in their everyday lives and, unfortunately, often inappropriately handled. But there are certain “keys” an individual should consider that might open the door to proper and efficient use of debt management within their financial lives.

Liquidity Is Key. Keeping the proper amount of liquid assets is vital to managing the current level of your debt. Debt has traditionally hurt very few individuals; it is the lack of liquidity and cash flow to manage the debt that primarily harms individuals financially.

Keep Debt Service Predictable. Try to avoid repayment schedules that require the debt to be repaid all at once at a future point in time, such as balloons or forced pay-off dates. If adjustable-rate financing is used negotiate interest-rate caps on your debt balance.

Do Not Accelerate Debt Payments. Don’t make extra principal payments on your mortgage until you have sufficient liquid savings and have paid off all non-deductible interest debts first and are fully funding your retirement plans, such as 401(k), TSA and IRAs. Principal pay downs should only be made after a full evaluation of the debt including interest rate, time and terms of the loan.

Try To Have Interest Deductible. Slash those non-deductible credit card balances as much as possible. While you hear this often, it can’t be emphasized enough. Consider using second mortgages, business loans, etc., to keep interest debt deductible.

Hold Debt Service Payments To Less Than 25% to 33% of Gross Income. As a general guideline, if you are exceeding this range you’re progressing outside the safe limits of debt management. Try to renegotiate terms of your debt to get fixed payments to the 25% to 33% level and do not acquire additional debt.

Use Credit Cards Only As A Convenience. Do not use credit cards to finance long-term purchases or items you cannot currently afford. Save for those items or use alternative forms of debt that are more efficient, such as deductible debt.

Protect Your Credit. Personal credit is extremely important ­ don’t abuse it. Get into the habit of making payments on time. Establish a good credit history early, as soon as you start your career or right out of school. Use credit cards in moderation to establish a good track record of prudent debt management. If you anticipate payment problems, be proactive and talk to your bank or credit card company as soon as possible to work out a repayment schedule.

Pay Cash For Purchases. Don’t finance or use credit cards unless it is absolutely necessary. Set a goal of paying cash for purchases and do not acquire them until you have saved enough, assuming no emergencies pop up. Remember, the less dept the better!

Review Debts Annually. Make sure your debts are as efficient as possible. Review often the interest rates you are paying are and don’t be shy about calling the creditor and negotiating a lower rate. Additionally, check out the option of refinancing if it will save you money.

As always, a regular review with your financial planner or accountant is the best way to check in on your financial health. Utilize your professional team- they are there to help you.

Neal A. Deutsch is a Certified Financial Planner^™, Registered Securities Principal and President of Chestnut Investment Group in Suffern, NY, helping people with financial planning since 1984. Please feel free to call Neal at 845.369.0016 or email him with your questions at neald@chestnutinvestment.com Feel free to visit his website at www.chestnutinvestment.com