A finance friend told me a story about a client who was trapped in consumer debt - large credit card balances with high interest rates. It was big, spooky, ‘keep you up at night’ kind of debt. After meeting with her and devising a plan, he received an email. The woman thanked him for his help, and shared that prior to their meeting, the debt was constantly on her mind, and it made her feel lost, helpless, and hopeless.
Debt can be scary. It can accumulate quickly, it can put a strain on a marriage, it can cause your assets to dwindle, or worse yet, impede you from building any assets at all. Consider the following:
A credit card balance of $10,000 at an interest rate of 18.99%, adds a whopping $5,575 in interest, if paid down over five years.
Carrying debt and having delinquent payments reduces your credit score leaving individuals with limited options when it comes to future borrowing. I know of a person whose options were so limited that when her car finally broke down for good she had to accept an auto loan at a rate of 25% - in a 2% interest rate environment. That $20,000 car is costing her $35,000.
Not understanding the terms of a loan can lead to nasty surprises down the road. One person I know thought that they had a fixed rate mortgage on their home, only to find out five years later that they actually had an ARM (Adjustable Rate Mortgage) when the payments suddenly skyrocketed. He found himself in a struggle to keep the house that he thought he could afford.
There are some fundamental things you can do to protect yourself from these debt surprises:
Build a foundational emergency savings account. Do you have enough set aside to handle the cost of an expensive car repair? Can you cover expenses for a few months if you were to suddenly lose your job? This type of cushion can help you to avoid difficult debt situations in the future.
Examine and understand your total current debt situation. Do you have any resources that can be used to make a dent in that debt now? Are you carrying the best debt right now, or can you make improvements by refinancing to a lower rate, better term or another type of loan? Do your research to avoid paying as much interest as possible and devise a payoff plan that aligns with your overall goals.
Get educated when you do need to leverage debt. Not all debt is bad, but nobody wants a bad debt surprise. Understand what the marketplace is offering, and shop around. More than likely, if even one lender is willing to lend you money, you’ve got options and should consider all of them before signing on the dotted line.
If you find that you need help, talk to someone who knows what they’re doing, or start with an online resource. Debt can be an embarrassing problem but through asking questions, getting informed, and taking action, we can eliminate the heavy burden of debt and live our best financial lives.
Jullie Strippoli is a VP and Branch Manager at Charles Schwab in Austin, Texas. She is a regular classroom volunteer with JA and serves on the JA F.E.M. Forum Committee because of her strong belief and support of JA’s mission that Opportunity is for Everyone.
Austin companies of all shapes and sizes are encouraging financial literacy and equity dialogue by supporting the JA F.E.M. Forum on Thursday, April 2nd, 2020. F.E.M. Forum brings together professional women with female students over breakfast for a morning of networking, mentoring and financial education. It’s the only event of its kind in Austin, the biggest annual fundraiser for JA Central Texas, and is designed for companies and business leaders who believe #FinancialEquityMatters. Learn more about the event and how you can support here.
