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September 15th, 2020

Getting Rid of Debt

Debt weighs you down. 

No one wants it, but it can seem so hard to get rid of.  If only it was as easy as it was to get it?

Debt comes in so many forms: The most common types include credit card, student loans, mortgage, and medical debt.  Regardless of the type, debt always acts as a financial burden and may become an emotional burden.  The good news is it is possible to get out of debt.

The first step you should take is consulting a Certified Financial Planner™ to evaluate your current financial status and devise a plan fit to your needs.  When you work with a Certified Financial Planner™, they will be able to offer sound, reasonable advice tailored specifically to your income, expenses, goals, needs, and wants.  

After delivering the plan, the next step is the most important, but for whatever reason, many people neglect it - follow your plan!  Your financial plan is in place for a reason, so take advantage and stick to it.  This will help you meet your goals and get rid of debt as quickly as possible.

As far as the debt goal is related, the trick is to find the most efficient form of financing for your debt.  In this context, “efficient” means calculating the best overall payment and interest combination that enables you to pay off debt while achieving your other financial goals.  

For example, let's look at options for paying down a mortgage.

Meet Michael and Jessica who are working with their financial planner to refinance their mortgage.  The couple is five years paid down on their current mortgage and could take a couple of different routes on their refinance.  They want to choose the option that will maximize their return in the long run.

Option 1 is to refinance their mortgage into a 25-year plan.  If Michael and Jessica decide to go with this option, then their monthly payment will not differ much from their current payment.  They will save on interest that they would pay if they were to choose a longer mortgage payment option.

Option 2 is a 30-year mortgage payment plan, hence a more long-term plan than option 1.  This means that the couple will pay more interest over this period, but their monthly payments will decrease drastically, saving the couple $3,600 per year.  They could invest this extra money over the next 30 years and see a future value of over $350,000!  This far outweighs the additional interest they will pay holding the mortgage another 5 years.

Thus, given Michael and Jessica’s goal to maximize their return on their mortgage refinance, then Option 2 (the 30-year mortgage) is the most fitting refinance plan.  This circles back to the idea of calculating the most efficient form of financing your debt in order to achieve your financial goals.  In the end, you will have paid off the house and have added another $350,000 investment portfolio to your balance sheet.

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