Managing Debt Effectively

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you are in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! We are officially in tax season, and Tax Day is fast approaching. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!

Although tax season is over, we are still available to help with any questions or concerns you may have. Before we get into today’s topic, we would like to make you aware that we are offering tax planning appointments to assist with questions about withholding, small business tax, retirement and investment accounts, sale or purchase of rental properties, or other estates, and more! Reach out to us to set up an appointment with one of our knowledgeable tax professionals. 

In our last post, we finished up our three-part series on everything you need to know in order to start a small business! We discussed everything from conducting market research and creating a business plan to choosing a business structure and opening up a business bank account! Starting a business of any kind is a great way to utilize your talents, make money, and be involved in your community. If you are interested in starting a business, be sure to check out part one and part two as well! 

Today, we’ll be discussing effective debt management. Debt refers to an amount of money borrowed by one party from another. This often comes in the form of amounts owed on credit cards, car loans, student loans, and mortgages. According to a 2021 report from CNBC, the average American has $90,460 in debt. Generally speaking, the lesser your income, the easier it is to pile on debt. Unfortunately, many people came to this realization during the COVID-19 pandemic. Debt can be overwhelming and can severely impact one’s everyday life by lowering credit scores or hindering one’s ability to make large purchases, such as buying a car or house. If you are interested in learning about how to manage debt effectively, you’re in the right place. Let’s get started.

Before we get into debt management, it is important to note that almost everyone is dealing with debt of some kind; Some people just have more debt than others. If you took out loans to pursue your education, start up your own business, or for any other investment or reason of self-development, debt is not necessarily a bad thing– As long as you manage it properly. Keeping track of and managing your debt effectively is key if you want to maintain a good credit score and avoid steep interest rates. Although repaying debt can be challenging, there are steps you can take to make the process go as smoothly as possible.

Understand What You Owe

The first thing you should do is make a list of your outstanding debts. This is especially true if you have taken out multiple loans or have multiple credit cards. Write down all of the amounts, monthly payments, due dates, and interest rates so that you can easily see what you owe. This will also help you determine which ones are taking the biggest hit from your wallet. By determining your biggest debts, you can prioritize them by paying off high-interest ones first, for example. After making this list, you should be able to clearly see exactly how much you need to pay off and when. However, you cannot just make the list, look at it once, and never revisit. You need to check it regularly to keep track and update it as needed. You can also use this list as an opportunity to create a budget that allows you to divide up a portion of income for necessities and another portion to pay back your outstanding debts. (You may find our previous blog on expense tracking helpful.)

Always Pay On Time

Once you have all of your due dates laid out, the most important thing you can do is to make payments on time. Late payments can make things more complicated for you, since there are often late fees– These can add up. Additionally, if you miss two payments in a row, this can increase your interest rate and finance charges. If you do miss a payment, be sure to pay it as soon as possible, rather than waiting for the next due date. This can help you avoid being reported to the credit bureau, since your payment history makes up about 35% of your credit score. If you are having trouble keeping track of your due dates, pencil them in on a calendar, put them into your smartphone’s calendar, or make an alert on your smartphone for several days before the payment is due, and another one on the day the payment is due. If possible, you should always try to pay more than the amount that is due. This helps you pay off your debt faster, and can also have a positive affect on your credit score. If anything, you need to pay at least the minimum, although this doesn’t necessarily help you make progress in paying off your debt. 

Look For Outside Help
If your debt becomes too overwhelming and feels like more than you can handle, there are other options available. Generally, the three options for debt management are debt consolidation, debt settlement, and– in the most severe cases– bankruptcy. Let’s take a closer look at what these options entail.

• Debt consolidation: This rolls multiple debts into a single payment. Typically, it uses high-interest debt, like credit card bills. If you qualify for a lower interest rate, this could be a good option for you. The two primary ways to consolidate debt are through a 0% interest balance-transfer credit card, or through a fixed-rate debt consolidation loan. Qualifying for these options can be difficult if you have a low credit score. However, debt consolidation works best if your monthly debt payments don’t exceed 50% of your monthly gross income, or if your cash flow consistently covers debt payments. 
  
• Debt settlement: In this case, your debt is settled for less than what you currently owe, with the promise that you will pay this new amount in full. This is sometimes known as debt relief or debt adjustment. It is usually done by a third-party company or a lawyer, who negotiates your debt for you. However, the fees associated with these services can vary depending on local and state laws.
  
• Bankruptcy: Bankruptcy is a legal proceeding initiated when a person is unable to repay outstanding debts. It is generally a last resort option. It offers a person or business the opportunity to start fresh and get protection from creditors. However, filing for bankruptcy may mean that you need to make some sacrifices, such as surrendering luxury possessions. Additionally, if you file for Chapter 13 bankruptcy, you’ll be placed on a strict budget for 3 to 5 years. 
  

As you can see, these are just a few of the ways to effectively manage your debt. Debt can be overwhelming, but you never have to go through it alone. Remember to look for outside help if you need it! We hope you found this article helpful, and we encourage you to reach out to us if you have any further questions. Here at Hoods Tax & Accounting, our tax professionals are always eager to give our clients as much help as possible when it comes to their finances. If you have any questions regarding your taxes, or if you need help with tax planning, contact us! Hoods Tax & Accounting offers a variety of services including small business consulting, QuickBooks training, tax preparation, accounting, payroll, and more! Visit our website for more information, as well as helpful links to resources you may find useful. Thank you for reading and we hope to see you back next time to keep learning about various tax and accounting topics!