4 steps to manage your debt

If you’re intentional about how you use it, debt can be a tool that allows you to make an investment into something important to you. Perhaps into education that will provide future opportunities. Or into a home or reliable transportation for your family.

On the flip side, if you’re not intentional and you accumulate too much of it, debt can hold you back from achieving what you really want in your life. It also can cause great damage.

It’s about intentionality and having a plan.

Have you thought about reducing or eliminating your debt? Or perhaps you’re considering a purchase or a choice that would cause you to take on debt. Considering the following steps can help you think through the role you want debt to play in your future.

This starts with asking yourself some questions. A good place to start is with the why: If you’re taking on new or more debt, why are you taking it on?

Consider if the gain of what you’re stretching yourself for is worth the stress it may induce. Consider these questions Boone Jackson, a Thrivent financial consultant in St. Charles, Missouri, poses to clients when talking about debt.

• Is the debt for a need or a want?
• Can it be added to your budget?
• How much debt do you already have?
• If something happens and you lose your income, can you still afford it?

“Too often we see people who want the home today that took their parents three moves to get; they want the car beyond their budget or the dream vacation,” Jackson says. “And they end up taking on too much debt to do so. Debt needs to be a conscious decision with a plan to manage it appropriately.”

And there’s a bigger question, too. Does having debt align with how you personally feel called to steward your resources? “If you look at your money as being God’s money, then you need to figure out if it’s the right thing to do for you,” says Rob Meaux, Thrivent financial consultant in Anaheim, California “And your decision will not be the same as someone else.”

The first priority before taking on debt is to review your income and expenses, Jackson says. In other words, know what you can afford to either throw at your current debt or potential new debt.

“You’ll identify your needs, the essentials that you pay for that are not going away, such as food, clothing, utilities, mortgage,” he says. “And don’t forget to budget for some fun money. Even if you don’t budget for entertainment, you’re going to do it anyway. It’s better to plan for it.”

You’ll also assess your wants, which could include things like upgrading your home or getting a new car, and any wishes, such as taking an expensive vacation or retiring at 60.

Ideally, Jackson says, your budget should cover your needs and perhaps a few wants while saving for your wishes. And if you have debt, you potentially can find some extra dollars to put toward reducing or eliminating it.

For those who want to reduce or eliminate debt, generally, there are two main methods: the snowball or the avalanche. With both methods, you make a list of your debts and plan to make the minimum payment on all but one of them, says Andrea Erhard, associate vice president of Business Banking at Thrivent Credit Union. You pay extra money toward that one with the goal of eliminating it first.

In the snowball method, you pay down the smallest debt first and work your way up. “You don’t even look at the interest rate,” Erhard says. “This method will slowly open up your cash flow as you eliminate debt.”

In the avalanche method, you pay extra money toward the debt with the highest interest rate. “For some, reducing the highest interest really helps people feel like they are making a dent in their debt faster,” she says.

• Get more tips: Overwhelmed by debt? Here are 7 actions to take today.

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Dive deeper

Once you’ve eliminated your debt or gotten it to a place that fits with your priorities, it’s time to celebrate your victories while also developing a plan to manage future debt.

“You can fix the debt, but if you don't fix the problem that caused the debt, you could potentially end up in a worse position in the future,” Meaux says. “You have to establish guidelines for your family and commit to keeping them.”

Both Meaux and Jackson also recommend building an emergency fund, so you don’t need to turn to debt when a major appliance breaks down or when your vehicle’s brakes need to be fixed.

“I also suggest you review your financial foundation, both your life insurance and your disability income insurance, to help reduce the risk of what could take your income away from you and your family,” Meaux says.

And decide what your limits are when it comes to using credit cards or other forms of debt. Using credit cards isn’t bad, but you have to manage how you use them.

But even if you do everything right, there’s no guarantee that you won’t find yourself in debt again. How you handle it will make all the difference.

If you want to decrease or eliminate your debt, Erhard offers these tips for you to consider:

• Create a monthly budget that accounts for all your expenses, not just the bills you need to pay. This helps you determine how much extra you have to put toward your debt.
• List your debts and decide which method—snowball or avalanche—you want to use. In both, you’ll list your debts and pay the minimum on all but one. In the snowball method, you’ll put extra money toward the smallest debt first. In the avalanche method, you’ll target the one with the highest interest rate.
• Review your interest rates on credit cards, vehicle loans and personal loans. You may want to transfer if you find something lower. But be careful as the transfer fee could cost you more than your current interest rate.
• Create a strategy to stay disciplined about the use of credit cards and loans.

Thrivent financial advisors have a variety of resources, including the interactive MoneyGuidePro® financial advice tool, that can help you find financial clarity with debt. Talk to a financial advisor. You also can keep your personal finances on track with tools to help you be more intentional with your money.