Risk & Debt Management

As you move through your career, it is important that you learn how to recognize risks and manage them, along with any debt that you may have, while they can still be managed.

Did you know that…

• The average U.S. household credit card debt is $16,748 according to a Nerdwallet study.
• 72% of Americans feel stressed about money according to the American Psychological Association and 22% feel extreme stress over their finances.
• Debt can be a cause for relationship issues.
• The way one handles money and debt is a reflection of priorities and values.
• It is important for individuals and couples to create a plan that they can agree on and achieve.
• Mismanagement of debt causes a domino effect
• Higher interest rates on credit cards and loans.
• Possible denial of jobs.

Debt is a financial tool that is often misused. Unexpected events can also throw individuals into deep levels of debt as well. Revolving debt is usually in the form of credit cards and department store cards, but is not limited to these two types. Consumers can spend and pay down balances to use the available credit again. However, credit cards may have higher interest rates because this type of credit is usually unsecured credit. Department store cards often have even higher interest rates. If one doesn’t have the funds or discipline to pay off the balance every cycle, then the compounding interest works unfavorably.

High levels of debt can cause anxiety and stress. A person may be getting letters and phone calls about their debts. Some creditors are aggressive with their collection procedures and can even cause fear to some. Additionally, the strain that it puts on a relationship can make someone feel that they are failing in so many areas in life. Money issues are often sourced as the number 1 reason for divorces and arguments in marriage. People say that money is tied to the heart. Basically your behavior determines how you spend and save your money. Because people have different philosophies on money and budgeting, this can cause issues when they combine finances in partnerships.

Aside from the psychological effects the stress of debt has, it may impact your ability to secure a job. Employers often use credit to determine if they want to hire a potential employee or not. Credit management may reflect decision making and some employers are not comfortable hiring someone who has poorly managed their financial obligations. However, this is not always the case. Furthermore, bad credit puts individuals in worse situations with home-buying due to being subject to higher or sub-prime rates. The person with a lower credit rating can not buy the same house a person with a higher credit rating, even though they may have the same income and buying power. This holds true for cars or any other big-ticket items that may be purchased via credit.

Managing Your Debt

Evaluate how much and what types of debt you carry. Some argue that there is good debt and bad debt. Ultimately, being debt-free maximizes your spending power but this is not always feasible. Some types of debt carry higher interest rates because it may be unsecured or considered higher risk. A payday loan or car title loan usually have a higher interest rate versus a mortgage because the financial institute has collateral that can be seized in the event of a default.

Spending less that what you earn is vital not only to retirement planning, but overall financial health. Living within your means includes not overspending but also means evaluating spending habits and evaluating wants vs. needs.

Having liquid cash in the case of emergencies gives you a sense of security to know that you don’t have to borrow money in the event an unexpected expenses occurs. Emergency funds need to be liquid and easily accessible in the case of an emergency. Your emergency fund should not be in your 401(k) for example. Experts say 6 months of expenses should be a target to maintain in a savings account in the event of a disability or emergency.

Credit Card Debt

Paying the minimum balance on a credit card can take years and in some cases decades to pay off. If at all possible, pay extra towards the balance of credit cards, loans, mortgages, etc. It is a sacrifice, but it saves in overall interest paid and that money can be used towards something else.

The chart below assumes no additional charges to this credit card. Additional charges will incur additional interest.