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Keys to debt management

February 23, 2011 - Debt can be a valuable and useful component of an individual's finances, if used efficiently and in moderation. But there are certain "keys" an individual should consider:

• Liquidity Is Key. Keeping the proper amount of liquid assets is vital to managing the current level of your debt. It is the lack of liquidity and cash flow to manage the debt that hurts individuals financially.

• Keep Debt Service Predictable. Try to avoid repayment schedules that require the debt to be repaid all at once at a future point in time, such as balloons. If adjustable-rate financing is used try to negotiate interest-rate caps on your debt balance.

• Do Not Accelerate Debt Payments. Not until you have sufficient liquid savings and pay off non-deductable interest debts first. Then only pay down your debt if you are fully funding your retirement plans.

• Try To Have Interest Deductible. Slash those non-deductible credit card balances as much as possible. Consider using second mortgages, business loans, etc. to keep interest debt deductible.

• Hold Debt Service Payments at Less Than 25% to 33% of Gross Income. Generally, if you are exceeding this range your progress is outside safe limits. Try to renegotiate terms to get fixed payments at the 25-33 percent level and do not acquire additional debt.

• Use Credit Cards Only As A Convenience. Do not use credit cards to finance long-term purchases or items you cannot currently afford. Save for those items.

• Protect Your Credit. Personal credit is extremely important – don't abuse it! Make payments on time. Establish good credit history early. Use credit cards in moderation. If in trouble, be proactive and talk to your bank or credit card company as soon as possible to work out a repayment schedule.

• Pay Cash for Purchases. Don't finance or use credit cards usless it is absolutely necessary. Set a goal of paying cash for purchases. "Delayed gratification" is a financially sound concept to follow.

• Review Debts Annually. Make sure your debts are as efficient as possible. This means making sure interest rates you're paying are low and competitive given changing market conditions. Also, check out the option of refinancing if it will save you money.

This material was prepared by Raymond James for use by James B. Kruzan, CFP, CRPC of Raymond James Financial Services, Inc.

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