What You Need to Know to Tame Your Debt

By Kaylie Reese

Debt isn’t something we often talk about in casual conversation, but it’s something millions of Americans struggle with at different points of their life, whether it’s student loans or a home mortgage or from credit cards. 

According to data recently compiled by Experian, American consumers carry more than $90,000 in debt on average. 

If you’re someone like me, who likes to set goals, why not consider finding a way to manage your debt? 

My partner and I are planning to enter the market to buy a house in the near future, but with our high student loan debt and car payments, in addition to other monthly expenses, we decided to get in better financial shape before doing so. 

So in an effort to learn sustainable ways to tame our debt, I reached out to financial experts who live and work in Greater Bangor. Here’s what they shared. 

Don’t hide from debt 

Even if we don’t talk about it very often, debt is extremely common. 

Approximately 80 percent of American households have debt, according to a Pew Research Center study. 

Ignoring debt won’t make it go away, so it’s important to understand first what you’re working with. 

For some, your first step could look like reaching out to talk to someone about your debt, whether that’s a trusted friend or family member or a financial professional. 

Matthew Skaves, chief investment officer at Deighan Wealth Advisors, said one way to think of debt is as a tool. 

“When it comes to debt, it’s just a matter of using it in a way that’s appropriate, because as a tool it can actually help your financial health,” Skaves said when talking about credit scores. 

Find out what you’re working with 

Start by requesting a credit report. According to the Federal Trade Commission, you are entitled to one free copy of your credit report every 12 months from each of the three credit reporting agencies: Experian, Equifax and TransUnion. On the report, you can find information on your previous and current credit history. 

Establish a budget 

Setting up a budget is crucial, and it costs nothing. 

First, identify cash inflows versus outflows, meaning what you earn versus what you spend. When doing so, I like to underestimate my income and overestimate things like bills, because it builds a small cushion. 

Second, sort monthly expenses by things you need, like mortgage or utility payments, versus things you want, such as monthly video streaming services. 

Third, identify what type of bills you are paying. I like to sort them in three categories: one-time bills, which could include tolls from a recent trip to Boston; recurring bills, such as a cellphone or rent payment; and loans, which feasibly have terms that will end. 

After bills have been paid, it’s important to have a plan with the amount of money remaining in a monthly budget cycle. 

If you’re looking to pay down debt faster, Skaves said it’s important to look closely at “needs” versus “wants” and to cut the wants back as much as possible so you can free up more cash to go toward debt repayments. 

(Please keep in mind that while this system works well for my family, it may not look the same for you.) 

Create a debt schedule 

Think of a debt schedule like a management system for loans. Start by creating a debt schedule that includes all your loans and balances owed, identify interest rates, and total amounts, John Tilton, financial planner at Financial Planning Associates, said. Next, identify your repayment strategy. 

“From a numbers perspective, it makes the most sense to pay down higher interest debt first, but many find a psychological or emotional advantage to paying down small balance loans first and reducing the number of outstanding loans,” Tilton said. 

Once a loan is paid off, Tilton also recommended using the money you would have paid to that loan toward the payment of another loan. 

Set up a plan that works for your household. 

Tackle high-interest debt first 

Tilton and Skaves identified loans with high-interest rates and flexible interest rates as the worst types of debt. 

When designing a strategy for repayment, Tilton said, these should be priority. 

Financial health is possible 

Be realistic with yourself and set attainable goals for now and for your future. 

For me, this means acknowledging that debt is something I’m going to have to include in my budget for years ahead. Because of that, my goal is to come to terms with that fact. 

For others, the goal could be to become debt free, or to start or grow an investment portfolio. 

Whatever your financial goal is, with careful planning and routine execution of your budget, be sure that the result gives you peace of mind. 

If it still feels like a puzzle, consider talking with a financial planning professional, who can help you get your plan established. 

This first appeared in the January/February issue of Bangor Metro magazine, available on newsstands throughout much of Maine. Bangor Metro is also available by subscription.