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February 8, 2021

Getting Rid of Debt

No one wants debt, but many people have their share of it, for one reason or another. Once it’s present, it’s very difficult to get rid of – much more difficult than it is to obtain!

Debt comes in many different forms. The most common types include credit card balances, student loans, mortgage, and medical debt.  Regardless of the type, debt always acts as a financial burden and often also becomes an emotional burden. The good news is, it is possible to get out of debt with the help of your financial advisor in Mount Pleasant.

The first step you should take is to consult 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. Unfortunately, it’s also neglected by many people, sabotaging what could be a great path to financial freedom: You must actually follow your plan! Take advantage of the experience and advice of your financial advisor in Mount Pleasant and stick to it. This will help you meet your goals and get rid of debt as quickly as possible.

An important strategy 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 consistently month by month while also achieving your other financial goals at the same time. It’s impractical to think the bulk of your income can go toward paying down debt; rather, your payment plan should also accommodate your need to pay for regular life expenses.

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 longer repayment term plan than option 1. This means 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 this savings of over $300,000! 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, 0ption 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, the couple will have paid off the house and have added another $300,000 investment portfolio to their balance sheet.

Get in touch with Twenty Fifty Capital today to speak with a financial advisor in Mount Pleasant about your debt repayment options.

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