A debt review could be exactly what you need to set your business and personal finances back on track. Taking a holistic look will help you set up a plan for debt management that sets your finances up for future growth.

Where to Start with Debt Review

Feeling overwhelmed by your debt is very common. According to Forbes, average credit card debt is at an all-time high. You’re not alone and there are ways to take control.

To begin understanding and managing you debt, you have to start by taking a look at ALL of the debt you’ve accumulated. Create a list of all outstanding debts. Include everything! That means car loans, mortgages, credit cards, student loans – all of it.

Once you’ve compiled all of your lines of credit, you can begin figuring out a plan of action to reduce and manage your debt effectively.

Healthy Debt vs. Unhealthy Debt

The idea of “healthy” debt probably feels crazy if you’re someone struggling with debt overwhelm. That’s a good sign that your debt isn’t healthy.

“Healthy” debt is any debt that is planned or strategic. A great example would be taking out a loan to start your business. This loan would be included in your business plan – along with the metrics you need to match to repay the loan. At an individual level, this could be a mortgage on a home that is within your means to maintain and pay. The goal of planned debt is to leave you with room to spend your money on other things beyond your debt repayment.

“Unhealthy” debt is any debt that causes you consistent stress. This is often a side effect of debt created outside of a plan. This debt may also be using more resources than you have or simply be preventing you from growing your savings or business. Any unplanned debt is unhealthy debt.

Interest Rates

Debt tends to build slowly. As a borrower, you may take out a credit card here, a car loan there, and then all of a sudden, you’ve got too many lines of credit to manage. And with each line of credit comes a different interest rate.

Interest is the biggest issue when it comes to debt accumulation. When you create your list of debts, be sure to include the interest rate for each one. Knowing the interest rate is essential in determining the best plan for your debt management.

We recommend interest rates of 6% or less to maintain “healthy” debt. While that may not always be possible, interest rates above 6% should be a cue to pause. Is the project you need those funds for really worth it? Higher interest rates may leave your income tied up in your debt repayment. As mentioned above, “healthy” debt should allow you to use your money on other things.

Questions to Ask During Debt Review

Once you’ve gathered a list of your different debts and lines of credit, what do you do with them? First, you’ll need to ask yourself a few questions.

• Is your debt growing? In the last year, has your debt increased? Have you added new lines of credit or accumulated more debt on existing cards? How much has your amount of debt changed?
• How long will it take to pay off your debt? What is the life span of your debts? From today, with your accounts as they stand now, how long would it take you to pay everything down? This may feel intimidating, but a realistic understanding of your debt is critical in making future financial decisions.
• How do you feel about your debt? As previously mentioned, the way you feel about your debt is indicative of how unhealthy your debt is. If you’re in a constant state of worry over your debt, then it may be time to take action to reduce your stress.

Consolidating Your Debt

During a debt review, your accountant may recommend consolidating your debt under one loan. This is one loan that you use to pay off other debts (credit card, medical bills, etc.), so that you only have to pay on that loan instead of the various other debts. The most common ways to do are through a second mortgage, refinancing your home to pull out equity, or through a private loan.

Not only does this simplify your monthly payments, but it can also save money in the long run. Before consolidation, your debts most likely have various interest rates – and remember, interest rates can be the killer when it comes to debt. Combining all of your debt under one interest rate can save you a significant amount of money, especially if some of your current debts have high interest rates already.

Getting Control Without Consolidating

Sometimes consolidation may not be an option – and that’s okay. You can implement a strategy to pay off your loans as quickly as possible while minimizing the growth of your debt. In our opinion, the best way to do this is by attacking your highest interest loans first.

Because interest is what makes debt the most unmanageable, knocking out the highest interest rates first helps control the growth of your debt. Focus on paying as much towards high interest loans as possible while making minimum payments on your other debt and knock each line of debt out one-by-one.

Debt and Small Business Owners

Debt can be a huge issue for small business owners. The stress and confusion on how to handle your debt while also continuing to invest in your business can be overwhelming. But there are ways to mitigate stress.

The important thing is always to strive to live within your means. Come up with a personal budget and stick to it to the best of your ability. Getting caught up in a cycle of living beyond your means is when unhealthy debt accumulates.

This is particularly difficult for small business owners who have fluctuating income. Our recommendation for all business owners is to set aside six months of emergency savings, both personal and business, so that you have a reserve in “bad” months. Being able to pull from your reserve stops you from making unhealthy debt choices during slow months.

Do Yearly Debt Review for Peace of Mind

A debt review can help you gain control over your debt – and doing annual debt reviews helps you keep control. Being aware of the status of your debt helps you make healthy decisions for your personal and business debts.

If this all feels a little overwhelming and you’re not sure how to create a plan for your debt management on your own, reach out to us and we’ll help you pave your way towards debt relief.