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Do you have a child or grandchild headed for college? Then you should consider putting that extra money into a 529 account. This plan is what's called a tax favored savings account and can be a very smart way to pay for a college education. These plans vary from state to state so you will need to go to a 529 Finder to determine the plan options available to you. For example, where we live there is a CollegiateInvest Direct Portfolio and a Scholars Choice College Savings Program. But in the state of Arkansas there is the Arkansas 529 Education Savings Plan and a Gift College Investing Plan. So if you're interested in saving for a college education be sure to go to the 529 finder page to learn what plans are available in your state.
6. Save the money for your next big purchase
If you save the extra money you now have from paying off that debt you should be able to make your next big purchase without having to use credit. Establish a savings goal and then work towards it. This could be a new car, a big home renovation project or a dream vacation.
7. Avoid going back in debt
If the debt you just paid off was a big credit card bill you will need to make sure that you change what's necessary to avoid doing it again. Once you’ve paid off a credit card bill the last thing you want to do is start accumulating new credit card debt. There's a reason why the credit card companies love people that run up debts on their cards. It's called compounding interest. Some have called it the most powerful force on earth. Whether this is true or not, one thing is certain. If you fall back into the habit of carrying your balance forward on a credit card, you will end up right back where you started — with a big debt. Here's an example of how this happens. Let's say you owe $5000 on a credit card at 18% interest and make just the minimum payment each month. When this is the case then, believe it or not, it will take you 273 months to pay off that debt and cost you $6923 just an interest.
Since you will obviously not be able to take all seven of these steps at once, choose wisely. Pick the one or two that make the most sense to you and that would do the most for your financial future. Then, start using that new found money to achieve your goal or goals. It should feel pretty terrific to not only have paid off that debt but to have a new goal you can start working towards that will mean a better future.
Frequently asked questions about debt
Q. What is debt to income ratio?
A. You can calculate your debt to income ratio by dividing your monthly gross income into the total amount of your monthly debt payments. For example, if your gross monthly pay was $5000 and your monthly debt payments totaled $2000 your debt to income ratio would be 40% which potential lenders would view as too high.
Q. What debt is forgiven after death?
A. This answer is simple. Any one that was just in your name belongs just to you and is forgiven. It is not passed on to your family members when you die. However, if you have a debt such as a mortgage that’s held in both your and your spouse’s name then the surviving spouse would be responsible for repaying it.
Q. Why debt is a good thing?
A. A small amount of debt is a good thing assuming you make your payments on time every time. This is because it will help you build good credit reports and a high credit score. You want a high credit score because this will allow you to get credit at low interest rates, which will save you money.
Q. When debt is too much debt?
A. If you calculate your debt to income ratio and its higher than 30%, that's too much debt. And maybe this goes without saying but if you find you’re unable to make all the monthly payments on your debts then you have too much debt.
Q. What happens when debt collectors take you to court?
The first and most important thing that happens is that you need to show up in court at the appointed time. If you fail to do this, the collector will automatically be awarded a judgment against you. When you meet with the debt collector in court you could try to negotiate a settlement. Most debts are purchased by debt collectors for literally pennies on the dollar. This leaves a lot of room for negotiation.
Q. What happens when debt is written off?
A. If a lender concludes that you will not be paying off what you owe then it will write it off. But this doesn't mean your debt goes away. What will likely happen is that it will be bundled up with a number of other debts that were written off by that lender and sold to a debt collector.
Q. Are debt consolidation companies worth it?
A. The answer to this will depend on the type of consolidation company you choose. One way to achieve debt consolidation is by going to a consumer credit counseling agency. This would be worth it because reputable credit counseling companies charge very little for their services and can usually help you become debt free in 4 to 5 years. A second option for debt consolidation is to hire a debt settlement company. This will not only consolidate your debts but should save you money as, on the average, a reputable debt settlement firm will save you anywhere from 30% to 37% of what you owe even after their fees.
Q. Are debt collectors legal?
Debt collectors are definitely legal. However, what they can and can't do is regulated by the Federal Trade Commission. For example, debt collectors are not allowed to call you prior to 8:00 AM or after 9:00 PM unless you agree. They are also not allowed to harass you with repeated calls, misrepresent the amount you owe or talk with anyone but you and your attorney (if you have one) about your debt.