Get Out Of Debt

Get out of Debt: Debt Reduction

Nearly everyone carries some kind of debt, but then, all debt is not created equal. There's good debt -- buying an 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. Just imagine yourself entering retirement having accumulated a comfortable nest egg of one million dollars. 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 of 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, do you need to be concerned about your debt? In order to determine this, you first need to be clear about your financial situation. Assess your worth by checking the value of all of your assets (retirement plans, investments, property, etc.), 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 vs. the amount of money going out -- your debt to income ratio should be no more than 30 percent. If it is, you're going to want to work on eliminating or at least minimizing debt before you retire. First, because 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 falls 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 loans balances. Then:

• Pay off the highest rate lender first.
• Make the minimum payment on all but the highest interest rate debt and pay all of the rest on the highest rate account.
• When that debt is liquidated, do the same with the next account and so on until you are free of consumer debt and other obligations that are not "good debt."

Excerpt of "TIAA-CREF Web Center | Debt Reduction." TIAA-CREF. 06 Sept 2006, 14:53 UTC. http://www.tiaa-cref.org/finance/debt_reduction.html