4 Tips to Help 40-Somethings Manage Their Debt

Handling debt is a challenge for those of all ages, and the problems start early in our adult lives. It's only natural to incur some heavy debts in our 20s and 30s, as we're dealing with the imbalance between our relatively scarce financial resources and the sizable expenses of getting started with careers and families.

By the time you hit your 40s, you might hope to have moved past that phase. But although many people in their 40s have well-established careers that produce sizable incomes, they also often face growing financial commitments -- both to themselves and to family members. That's a big reason why 40-somethings have the highest levels of debt of any age group, and unlike younger groups, they've seen their debt levels increase slightly since 2005, according to figures from the FICO Banking Analytics Blog.

Debt management in your 40s isn't just about paying down debt. It's also about making sure you're using the right kind of debt to handle the most important expenses you face. Also vital -- maintaining the ability to repay your debts while simultaneously ramping up savings for your longer-term goals.

To address all those issues, here are four things that 40-somethings should keep in mind in dealing with their debt.

1. Anticipate Big-Ticket Expenses.

Dealing with unanticipated expenses can break the budgets of young adults. But by the time you hit 40, you have plenty of life experience behind you and can predict what sorts of financial demands will come up. In particular, major expenses like putting children through college or replacing a vehicle are fairly easy to foresee. The smarter you can be about planning for them beforehand, the better you'll be positioned to minimize how much debt you have to take on to pay for those expenses later.

Having an emergency fund with three to six months' worth of income is out of reach for many young adults, but by your 40s, it becomes more realistic. Having that fund available can keep you from incurring debt and provide a cushion you can tap later for college expenses and other big-ticket items.

2. Get The Right Protection For Your Family.

As 40-somethings hit the peak debt levels of their lifetimes, they're most vulnerable to unforeseen tragedies like a death or major illness in the family. Between lost income and increased expenses, such events can crush even a well-crafted financial plan.

Having the right insurance policies in place to protect against tragic events can ensure your family's financial survival. A simple term-life insurance policy usually costs relatively little but can provide enough death benefits to pay off a home mortgage and other debt while potentially leaving additional savings available for future needs.

Disability insurance can replace lost income and cover qualifying expenses if you're unable to work following an accident or illness. Working with an insurance company to craft the right protection package for you could mean the difference between beating debt and suffering a big financial setback.

3. Put Your Best Debt-Foot Forward.

Young adults tend to take advantage of credit wherever they can get it. But as you get older, your access to better credit should increase, allowing you to skip expensive forms of debt like credit cards and payday loans and instead get low-rate loans that are much easier to pay off. Although low-rate specials on car loans and credit cards can make their interest costs attractive, the most consistently inexpensive financing usually comes from a home mortgage or home equity loan, with government-subsidized student loans also offering reasonable rates for many students. If you have to have debt, look to consolidate it into these favorable areas, then avoid taking out further high-cost debt in the future.

4. Set the Stage For Your Own Future.

As important as debt reduction is, 40-somethings also have to face the inevitability of their own future financial needs. One big reason why it's so important to get rid of bad debt and focus on concentrating outstanding balances in inexpensive forms of credit is to give yourself the flexibility to save more for retirement. As your salary increases, the potential matching contributions from your employer also rise, and you won't want to miss out on the opportunity to collect more free money to put toward your retirement savings.

The hallmark of your 40s is that debt stops being a necessary evil and starts becoming more of a potentially useful tool. By focusing on the positive aspects of debt in helping you balance competing financial needs while avoiding the downsides with which you're already familiar, you can put debt on your side and manage it effectively.

source: dailyfinance.com

How to Determine How Much to Give

 Dear Dave,

We’re debt-free except for our house, and that’s on a 15-year, fixed-rate mortgage. We also have an emergency fund in place. We’d like to give back this year, and do some Secret Santa things and a little extra giving. At what point should we start giving over and above what we tithe?

-Jeremy




Dear Jeremy,

My advice would be to wait until you finish Baby Step 3, which it sounds like you’ve done. That way, you’ve paid off all of your debt, except the house, plus you have a fully-funded emergency fund of three to six months of expenses.

You mentioned tithing, so I’ll cite the Scripture that says he who doesn’t take care of his family is worse than an unbeliever. I’m paraphrasing, of course, but in my mind, from a financial point of view, taking care of your family means having your emergency fund in place and being out of debt, except for your house. At that stage, you’re beginning to build wealth and you can really help others while knowing those closest to you aren’t going without.

My wife and I made the decision a long time ago to live on a certain amount of money. We apply a formula to everything above that figure for tithing and taxes. The rest we allocate for giving, saving and spending. It works great for us, but be responsible and realistic with what you have. You don’t want one of those areas to hinder the others.

-Dave

Dear Dave,

Do you have any advice for deciding which charities to give money to during the holidays?

-Danny

Dear Danny,

There are so many great organizations out there. It’s virtually impossible to pick three or four and say with any certainty they’re the best.

When it comes to choosing, I think the amount of diligence you put into the decision-making process should correspond directly to the amount of money you’re giving. There’s no reason to spend hours in exhaustive study over a $20 donation. However, you’d want to put some time and thought into research if the amount is $2,000.

In situations like this, I’d want to see full disclosure. I’d like to know the expense ratios of the organization and how much money goes toward administrative costs. Every organization has bills to pay and salaries to consider, but you don’t want overhead to eat up 90 percent of every dollar donated.

Helping a good cause is wonderful, but you’ve got to be reasonable and wise about these things. Don’t feel bad about asking to visit a site and take a tour. Lots of times you can get a feel for what’s going on by just walking around and gauging the people you encounter. Regardless, the bigger the gift, the more time you should spend investigating!

—Dave

source: foxbusiness.com

What Is The Difference Between Overdraft and Debt?

People get themselves into debt in a variety of ways. Any type of credit that consumers use but do not repay as agreed is considered debt. Credit card balances, loans, and car financing can all be considered debt if they go unpaid. An overdraft is another type of credit that can eventually become debt if a consumer fails to increase the bank account balance to cover the overage. Before making use of an overdraft, consumers should understand what they could be doing to their finances.

Some banks and building societies offer a feature called an overdraft, which is a loan arrangement via which the institution extends credit up to a certain amount against which the account holder can make withdrawals or write checks. It is considered a revolving loan, with interest charged daily on the overdraft balance. Most institutions place a fixed length on overdrafts and if this is exceeded or the negative balance exceeds the permitted amount, additional fees and higher interest rates may be imposed.

An authorized overdraft is pre-arranged with a UK bank or building society. When the authorized overdraft limit is exceeded, the account holder is considered to be overdrawn without authorization. All major UK banks impose unauthorized overdraft fees. However, some provide a buffer zone that will not incur fees. In addition, some banks provide a grace period within which money can be repaid without bank charges from being incurred. For example, an account holder who goes into unauthorized overdraft on  Friday may avoid related charges if the money is repaid by Monday morning.

A bank may be permitted to freeze the account of an individual with an overdraft until the money is repaid. The account holder will not have access to deposits made in the account including salary payments. It can be expensive to establish an overdraft because this may involve a setup charge and a monthly fee for use of the feature. An overdraft can become very expensive if a lot of money is borrowed and is not quickly repaid.

Overdrafts and other money owed to banks or building societies are considered non-priority debts unless the loan is secured by the home. Despite this classification, a financial institution can take the account holder to court to order repayment of what is owed plus additional charges. Consumers who owe money to their banks should establish a personal budget to repay it and discuss repayment with the institution to avoid court proceedings.

When consumers find themselves unable to afford overdraft repayments, they should inform their financial institution. Possible solutions are freezing overdraft  interest and other charges, changing the monthly repayment amount, and extending the repayment period. If an account holder regularly misses repayments without informing the bank, the institution may pursue a County Court Judgment (CCJ).



To prevent an authorized overdraft from becoming a debt issue, account holders must be diligent about repayment. This overage is considered credit and should be treated as such when budgeting expenses each month. The last thing most consumers want is a CCJ that will affect their credit rating for several years.

source: everythingfinanceblog.com