Money Mindset: Debt
These days, everyone talks about the life changing benefits of mindfulness. An aspect of mindfulness is often overlooked, but is equally beneficial and important, is what we like to call your "Money Mindset". The money mindset is one has when keeping their financial situations in mind when making decisions. This can be as easy as saying no (or yes, depending on your budget) to that iced coffee or as complex as buying a house. Everybody’s money mindset is unique, with no two alike in style, preference, and goals. Over the next ten weeks, we will be diving into the “Money Mindset” and providing tips and tricks to help you achieve and sharpen yours.
Debt is the number one factor people take into consideration when making financial decisions, Debt is also the main reason most people have a hard time achieving financial freedom.
Get Out of Debt
First things first, pay off your debt ASAP. Although it may seem daunting at first, taking the time to analyze your debt and setting up a payment plan will pay off in the long run. Whatever your current interest rates are, are a return to you once paid off. As Dave Ramsey says, get mad at your debt. Pay it off ASAP.
Pay Off Your Student Loan Debt
If you have student loans, pay them off. Student loans are not collateralized and cannot usually be discharged in bankruptcy. This means you’re most likely going to be stuck with your student loans unless you pay them off. If you qualify for a forgiveness program for working in public service, that’s also an option to explore. Get down to business now and make sacrifices so you can get out of student loan debt. It’s not “good debt.” It’s debt that needs to go away.
Use Your Credit Cards to Your Advantage
It’s a myth that you have to keep a balance to build your credit score. Pay your credit card in full, or as close to as full as possible, every month in order to maintain a low debt to income ratio. If you are somebody that likes to take advantage of points, pay most of your expenses with your credit card and just pay with the cash you would have spent any ways as you go.
Use Debt Ratios as Guidance
Compare your debt to a few standard debt ratios. Use these debt ratios to when making financial decisions. A few debt ratios to consider are: Consumer debt should be < 20% of net income. Consumer debt includes credit cards and other financing like a car loan. Housing debt should be < 28% of gross income. This includes a mortgage or any rent expenses. Total debt should be 36% of gross income. As you work to pay off your debts, these ratios also serve as a guide to not incur more debt.
Don’t Borrow From Your Retirement Account
A good rule of thumb is not to borrow from your retirement accounts unless you absolutely have to. There can be tax consequences and penalties when you borrow from your retirement accounts that can make the transaction more costly than beneficial. Working towards growing and maintaining a liquid savings account can help with emergencies and prevent any need to dip into your retirement accounts.