If you have accumulated a lot of bad debt it can be quite a frightening experience. You might have bought new furniture for your living room, a new car, or some other consumer item that has placed you in debt. Luckily there are strategies you can use to get out of debt. Many people build a mental brick between their savings and investment accounts and the consumer debt accounts. This can actually be a mistake because it means that you are not looking at your finances wholistically. In many cases, it is a perfectly rational strategy to use you savings to minimise your consumer debts. This strategy can be particularly effective where you have a high interest credit card debt or a high interest car loan or other type of personal loan that is costing you a lot in interest.
Obviously when you reduce your debts you also reduce your savings but thinking about it from the perspective of your total net worth which is measured by comparing your assets with your liabilities. With most people’s personal finances, the returns that they are earning on their investments is lower than the amounts that they are losing to interest repayments. If you pay off your consumer loans or credit cards which might be charged at 12% interest this is most likely to be beneficial because investments generally only earn between 5 and 10% return per year. Although you may earn more by investing in a hot stock tip or a piece of real estate, there is always a risk associated with investments with high rates of return so paying off your debts is usually the less risky option in the long run.
One strategy you can use in your personal finances to work toward the goal of paying off your consumer debts is to compare the credit products that you are using at the moment. An example is a credit card. Credit cards now have a bewildering array of various interest rates, features, awards programs annual fee regimes and cash back incentives. If you analyse your spending patterns and your ability to pay off your existing consumer debts you can often work out a better deal on your credit card by finding a product that suits you better. This may involve leveraging a good credit history or it may involve observing that you hardly ever travel meaning that you do not need a card with frequent flyer miles which translates into a lower interest rate that benefits you. One of the complicated things to work out is how to compare all of the products out there. There are a number of credit card comparison tools available now which can assist with this process.
David A Coleman