For many Americans, debt is a fact of life. According to a study from NerdWallet, the average American household has more than $15,000 in credit card debt and more than $130,000 in total debt.1
While some forms of debt, such as mortgages and student loans, can be helpful, others, like credit cards, can threaten your financial stability. In retirement, debt can be especially dangerous. If you’re living on a limited, fixed income, you may not have room in your budget to make substantial debt payments.
Fortunately, if you’re not yet retired, you can still take action to reduce or even eliminate your debt. Below are four steps you can take today. The earlier you take action, the easier it will be to become debt-free before retirement.
Get a lower interest rate.
Interest is an important component of the lending process, but it’s also what can make it so hard for borrowers to get out of debt. If you’re dealing with an especially high interest rate, little of your payment may actually go toward paying down the balance. Much of it may go toward interest.
There are a few ways you can reduce your interest to make sure you’re paying more money toward the debt principal. One is simply to call your lenders and ask them for a lower rate. If you have a good payment record, they will likely at least consider the request.
Another option is to refinance the debt. For example, you could use a low-interest home equity loan to pay off credit card debt. Or you could transfer a high-interest credit card balance to a new card with a low introductory rate. Of course, the key is to make sure you keep your payments the same so you can pay off the balance before the rate jumps up.
Make extra income on the side.
Another way to pay off debt is to make additional income. Your salary may be locked in at your full-time job. However, you could increase your income by taking on side work. You may want to look into a part-time job for evenings and weekends. Or perhaps you have a skill or talent that you could use to start a part-time freelancing business.
Working two jobs may not be ideal, but it’s likely going to be better than paying off debt well into your retirement. A short period of extra work today could help you enjoy decades of financial stability later.
Tap into life insurance cash value.
Many people buy life insurance as they progress through their career. As they buy homes, have children and increase their income, the need for life insurance tends to grow. However, as you approach retirement, you may not have the same need for coverage. Your house could be close to being paid off, and your children are likely financially independent.
You may want to check your policies to see if they have any accumulated cash value. If so, you may be able to tap into that money through either a withdrawal or a loan. You can use the funds to pay off high-interest debt and create more flexibility in your budget.
Downsize and scale back.
Even after getting a lower interest rate, increasing your income and tapping into other funds, you still may have a debt problem. If that’s the case, it might be time to make choices about your lifestyle and your budget. You may want to consider downsizing and scaling back your expenses.
For instance, you may be able to move into a smaller home, thus reducing your mortgage and other housing expenses. Maybe you could reduce your travel expenses or start eating at home more frequently. If you’re providing aid to a grown child, maybe it’s time to help them be more financially independent.
Debt can be a challenge in retirement, but it’s often a solvable problem. For help with your debt, contact us at Carstens Financial Group. We will analyze your goals and needs and help you develop a plan to eliminate your debt and live a comfortable retirement. Let’s connect today.
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