Borrowing

Credit card debt aside, one of the challenges navigating your personal finances year over year is learning how to balance when to borrow versus when to save because debt isn’t always all that bad if it’s done properly. The first area outside of credit card debt you want to address is your mortgage. Tax incentives allow homeowners to deduct some mortgage interest off their income which creates a nice tax savings for some. Yet, most people who borrow don’t think about the long-term impact of how much money they’re spending in interest.

For example: You have a $250,000 loan with a 4.25% interest rate and a loan term of 30 years. If you pay that off over 30 years, you’re going to pay $206,016 total interest over the life of that loan! What you want to do is look at simple techniques like making bi-weekly payments rather than monthly. The total interest you would pay over 30 years goes down to $171,182. That’s $34,143 in savings without doing anything dramatically different. You’re still paying the same monthly amount, just paying it twice per month.

Something else to think about – increasing your monthly payments. Take that same $250,000 loan. If you add an extra $200 a month to your payments, the total interest you pay would go down to $149,454 – $56,562 in savings. It pays to think globally about where you’re spending every month. Think about the difference $200 a month could make over time. It could save you money and potentially make your financial goals more achievable.

Lifestyle

Many people keep dipping into their savings to bail themselves out of credit card debt that accumulates over the holidays, after a big vacation, etc. Let’s say you have to take $4,000 a year out of savings to pay short-term credit card debt you accumulate due to poor planning. Over a 30-year period growing at 7.5%, that $4,000 ends up being $444,617 you don’t have in your account. It’s hard to believe that a few thousand per year can add up, but it does!

Surprises

There’s no fancy planning strategy for debt. You simply need to plan and budget for your expenses and set aside money for things that will come up in the future like broken appliances or medical emergencies.

Also, start looking at your debt and find ways you can pay it down quickly and effectively. The best thing you can do to carve out a path for financial freedom is set a course for long-term success. There are no short cuts. For most, we need to craft a strategy, live a reasonable lifestyle within our means and enjoy the journey.

Are you looking for an Arizona wealth management firm to provide personalized investment management? If so, contact the wealth advisors at Henry+Horne Wealth Management.

Michael Carlin, AIF®