2753: 3 Debts You Should Eliminate Before Retirement by Kumiko of The Budget Mom on Debt-Free Living

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[00:00:58] This is Optimal Finance Daily, Episode 2753. Three Debts You Should Eliminate Before Retirement

[00:01:17] by Kimiko of TheBudgetMom.com. And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:24] Let's get right to today's post as we optimize your life.

[00:01:31] Three Debts You Should Eliminate Before Retirement by Kimiko of TheBudgetMom.com.

[00:01:38] Being in debt while you're still working can be a nagging problem and even prevent you from

[00:01:43] saving for retirement. But carrying that debt into retirement can also be dangerous,

[00:01:48] and in some cases, even more so. When you're in retirement, you're working with a fixed income.

[00:01:54] The simple truth is you can't afford to have a majority of your income eaten up by debt payments.

[00:01:59] To get the most out of your retirement, you need to make sure you have as much money as possible

[00:02:04] to fund the lifestyle you desire. Here are three types of debt you should work on eliminating

[00:02:09] before you retire. Number one, unsecured debt. If you're living with a fixed retirement income,

[00:02:16] you might not be able to afford to make the extra payments on the money owed.

[00:02:21] If you're spending years in repayment, much of your fixed income ends up going to high interest

[00:02:25] payments. Credit card debt can not only wreck your credit score, but it's also costly to pay off.

[00:02:33] For example, if you have a credit card with a $5,000 balance with 18% interest,

[00:02:38] it'll take you roughly 84 months to pay it off. Not only that, but you'll pay close to $4,320

[00:02:46] in interest over that period. How to pay it off. It's best to come up with a plan to eliminate

[00:02:53] unsecured debt during your working years. A straightforward approach to paying off credit

[00:02:58] card debt is to list out your present debts, figure out which cards charge the most interest

[00:03:03] and pay those off first before moving on to the ones with less interest. Taking advantage of

[00:03:09] balance transfers to eliminate debt faster might also be an option. You can transfer your total

[00:03:15] balance to a card with a lower interest rate than what you are currently paying to save time

[00:03:20] and money on interest payments. Number two, student loan debt. Student loans are often viewed as a

[00:03:27] younger age problem, but the truth is more and more older Americans are finding themselves on

[00:03:32] the hook for educational loans. Not only is this debt they took out for themselves, but the major

[00:03:38] problem is when parents take out loans for their children's education. The process of being accepted

[00:03:44] for a Parent PLUS loan is minimal. There's only a basic credit check and no underwriting to

[00:03:49] determine whether the borrower has the income or ability to repay the loans. With emotions evolved,

[00:03:56] it's easy to take on more than you can handle. You may not realize it, but in retirement,

[00:04:00] even a small amount can prove difficult to repay. Funding your child's education can be an emotional

[00:04:06] topic. I would love to help my son pay for college, but I won't sacrifice my own retirement

[00:04:11] to do so. Instead, I took another approach and started planning and saving early for his

[00:04:17] educational costs. Two weeks after my son was born, I opened a UTMA account. Throughout the year,

[00:04:24] I saved my leftover change from my cash spending and invested in his UTMA at the end of the year.

[00:04:30] I'll save what I can during my working years, and I'll help him as much as I can financially,

[00:04:36] but only to a limit that I can honestly afford. The truth is, helping my son pay for his education

[00:04:42] is important to me, but he also has more time than me to pay off his student loans.

[00:04:47] When I'm a senior living on a fixed income, I won't be able to generate more money to

[00:04:52] repay these debts, and I can't replace the retirement savings that I take out for repayment.

[00:04:58] How to Pay It Off

[00:05:00] When you're in a financial bind, there are different ways to repay your student loan debts

[00:05:04] that make it a little easier on your budget. For example, if you only have direct loans,

[00:05:10] there are income-driven repayment plans that allow you to make monthly payments based on your income

[00:05:15] and family size. If you decide to use one of these options, you have to keep in mind that it will

[00:05:20] extend the period of time that you'll be paying off your student loans. I recommend using these

[00:05:25] options if you're in a financial hard spot, but make sure your time on these plans is limited.

[00:05:31] If you can, I recommend sticking to the standard repayment plan, which will pay off your student

[00:05:36] loans in the shortest amount of time while saving you the most money on interest. There's an option

[00:05:41] to consolidate Parent PLUS loans. You could possibly decrease high interest rates, but

[00:05:47] the parent must qualify based on credit and income. Refinancing is another option for Parent PLUS

[00:05:53] loans. And number three, mortgage debt. Many people who own homes or property take out

[00:06:00] 30-year mortgages in their early 30s and manage to pay off their loans by the time they retire.

[00:06:06] But what happens when you buy a home or property later in life? If you end up carrying mortgage

[00:06:11] debt into retirement, that'll make what's already your greatest monthly expense even more burdensome.

[00:06:17] Just like with people, the older a home becomes, the more money it costs to keep them healthy.

[00:06:23] Dealing with a mortgage payment and the upkeep costs of owning an older home during retirement

[00:06:28] can cause substantial income restrictions. If you work on getting rid of your mortgage payment

[00:06:33] before retirement, that's one significant bill you don't have to worry about. If you can pay off

[00:06:39] your mortgage before retirement, you can significantly decrease your housing costs,

[00:06:43] eliminate your biggest expense, and you can make your savings last much longer.

[00:06:48] If you can, try buying a home on the low end of what you can afford and avoid refinancing your

[00:06:53] home, which usually extends your repayment period. How to pay it off. One way to tackle

[00:07:00] your mortgage debt is by making extra payments to your loan. Think of it this way. The more extra

[00:07:06] payments you make on your mortgage, the more each one of your regular payments goes straight to the

[00:07:11] principal balance. Try making an additional house payment every quarter or dividing your mortgage

[00:07:17] payment by 12 and add that amount to each monthly mortgage payment that you make. Just a word of

[00:07:22] caution. If you're thinking about making extra mortgage payments, make sure you talk to your

[00:07:27] mortgage company because they might charge prepayment penalties. When completing an extra

[00:07:32] mortgage payment, make sure it's getting applied to the principal balance of your loan and not

[00:07:37] next month's payment. It's critical to take steps to ensure you have an effective debt management

[00:07:42] strategy in place and to take early action steps to eliminate debt before you retire.

[00:07:52] You just listened to the post titled, three debts you should eliminate before retirement

[00:07:58] by Kimiko of thebudgetmom.com and I'll be right back with my commentary.

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[00:08:09] the edge it needs with USPS Ground Advantage Shipping from the United States Postal Service.

[00:08:15] Keep everything simple with clear upfront pricing and no unexpected surcharges.

[00:08:21] Keep things affordable with some of the lowest prices out there and keep it all reliable with

[00:08:27] on-time ground shipments. It's time to turn shipping to your advantage. Learn how at USPS.com

[00:08:35] slash advantage. USPS Ground Advantage, simple, affordable, reliable.

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[00:09:57] Member FINRA SIPC. For more information, visit Acorns.com. Another reason to tackle debt well

[00:10:04] before retirement is that you don't want to be battling compound interest when you're on a fixed

[00:10:09] income. Compound interest, a powerful financial concept that can work wonders when saving and

[00:10:15] investing, becomes a significant burden when one carries debt. Unlike simple interest, which is

[00:10:21] calculated only on the principal amount, compound interest accrues not only on the initial debt,

[00:10:26] but also on any accumulated interest, leading to exponential growth in debt over time.

[00:10:33] This means that even if one makes minimum payments, the debt continues to grow as interest

[00:10:38] accrues on both the principal amount and any unpaid interest. The longer the debt remains

[00:10:44] unpaid, the more significant the impact of compound interest becomes. Also, high interest rates

[00:10:50] exasperate the effects of compound interest, leading to even faster accumulation of debt.

[00:10:56] This can result in individuals paying significantly more in interest charges over the long term,

[00:11:02] further eroding their financial stability. Overall, compound interest working against you

[00:11:07] when you have debt highlights the importance of addressing debt promptly and prioritizing

[00:11:13] repayment to minimize its detrimental effects on financial well-being. But that will do it for

[00:11:19] today. Have a great day and weekend, and I'll be back here tomorrow as usual, where your optimal

[00:11:24] life awaits.