Posted by Abundant Wealth Planning LLC

What To Do If You Are Young & In Debt

What To Do If You Are Young & In Debt

Young Americans struggling with debt could have nasty additional tax surprises this year.

From the need to pay taxes on canceled debt to reduced deductions for non-repayable loans, some taxpayers are willing to owe more than they might realize, contributing to an already confusing fiscal year. Some taxpayers are at risk of losing their refunds to debt collectors.

The pandemic has changed many people's lives, and this has directly or indirectly affected their taxes.

Between a mortgage, student loans, credit cards, car loans, and medical bills, debt can spiral out of control before you know what's going on. If your debt is due to job loss, unexpected expenses, or overspending, you can reduce it and possibly eliminate it.

Managing your debt takes time and effort, but combining strategies and maintaining consistency can help you get out of debt successfully. Here are some hints to help you get out of debt, especially as a young person.

Stop accumulating debt

This strategy alone will not save you from debt, but it will prevent you from making it difficult to pay off. Reduce the temptation to create more debt by freezing your credit card or taking a break from using it.

Freezing your credit card prevents credit reports to new inquiries, making it difficult to apply for a new loan on impulse. This step is usually aimed at minimizing identity theft, but it can also help you avoid opening new credit lines.

If you don't already have one, now is the time to create a budget. A budget assists you in aligning your spending with your income, making the most of every dollar you receive, and making sure you don't have to use credit cards or loans to survive.

Create an emergency fund

Putting money in an emergency fund can seem counterintuitive if you are trying to get out of debt; you can use that money to pay off your debt instead of putting it in a savings account, but an emergency fund can keep you from creating more debt. These savings give you a safety net you can use for emergency spending, keeping you from looking for your credit card.

The ideal emergency fund has six to twelve months' worth of living expenses, but you can start by accumulating at least $1,000 or whatever you can save.

Use the snowball method.

The less you pay each month for the outstanding balance, the longer it will take to pay it off. Interest rates can exponentially extend the time for debt settlement, and most debt balances bear interest each month.

Many people think that debt snowballs are a good way to pay off their debts. This method allows you to make significant progress by paying off your minimum balance as much as possible each month. In the meantime, make the minimum payment of all other debts so that your bills stay up to date. Once you've paid off your lower debt, switch to your new lower balance and continue this process until you've paid all of your bills.

The debt avalanche approach is an alternative to the debt snowball method. With this strategy, you will start to pay off as much debt as possible at the highest interest rate. Once paid, move to the balance with the next highest interest rate and so on.

Request for a lower interest rate from your creditor.

Higher interest rates keep you indebted for longer because a large chunk of your payment goes towards monthly interest, not your actual balance. Nonetheless, interest rates are negotiable, and you can ask credit card issuers to lower your interest rate. Lenders do this at their discretion, making customers with good credit histories more likely to successfully negotiate lower rates.

You can find a lower interest rate by searching for offers. If you are using a balance transfer for a lower rate, try paying your balance before the promotional rate expires. After this promotional period, the balance will be subject to higher interest rates.

In general, you must have good to excellent credit to qualify for a low-interest credit card or balance transfer.

Increase your income

The more money you invest in paying off your debt, the faster you can pay it off forever. Find ways to earn extra money to spend on your debt. For example, you can make extra money by selling things around the house, starting a side business, or learn how to monetize what you do for fun. You can earn more from your full-time job by negotiating a raise or working more hours.

Retire from the pension fund

In extreme cases, we recommend that you withdraw money from your retirement account to pay off your debt.

If you are under 59 and a half, you will receive early retirement penalties and additional tax obligations. The specific penalty you'll face depends on which retirement account you're retiring from and how you're spending the money, but the standard penalty for early retirement is 10%.

Also, when the pension comes, your savings will be minimal, not only with the money you took out but also with the interest, dividends, and capital gains you might have earned with that money.

You can borrow from work-sponsored retirement plans, such as a 401(k). However, this strategy also comes with risks. If you quit your job, you will have to pay off the loan quickly, making your debt problems worse.

Cash-out a life insurance policy.

You may have accumulated money in the full or universal life insurance policy, which you can pay off the debt. Besides using pension funds, this is a risky strategy that can have tax consequences.

Cashing out means giving up the life insurance policy, and it will no longer be in effect. A loan with an insurance policy can also be an option, but it can affect the death benefit beneficiaries will receive.

Settlement of debts

Debt settlement can be a solution if your bills are overdue or you owe more money than you could pay in a few years. When you pay off your debts, ask the lender to accept a lump-sum payment, that is, payment less than the total balance to pay off the debt in full. Creditors generally only accept offers to settle for accounts in default or at risk of default. Debt settlement can harm your credit score, so it should only be used as a last resort.

You can pay off your debts yourself by negotiating directly with your creditors, or you can get help from a debt cancellation company. Beware of any organization that advises you to be intentionally late, hoping to pay off your debt when your accounts are in default.

Credit counseling

Credit counseling agencies are normally non-profit organizations that can help you manage your finances and debt. When it comes to paying off your debt, authorized credit counselors negotiate on your behalf with creditors to create an affordable debt management plan. Each month, you send a general payment to the credit counseling agency, allocating the payment and sending it on your behalf to creditors.

A debt management plan designed with a credit adviser is very different from a debt settlement - you don't have to be by default to get credit counseling, and the goal is to pay your bills by default whole.

Bottom Line

While some of these steps may seem small, like avoiding new debt and creating an emergency fund, they are important in building a solid financial foundation that will allow you to pay off your debt. Tracking progress helps you stay focused and reminds you as you are getting closer to your debt settlement goal. You can talk to a financial consultant such as ABUNDANT WEALTH PLANNING, LLC. for other possible ways to help you get out of debt.



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