In the United States, there has been great debate surrounding the federal government’s “debt ceiling” — the maximum debt the U.S. government can assume. Since the U.S. government recently received a downgrade on its credit rating from S&P — one of the primary agencies responsible for evaluating the creditworthiness of nation-states — all issues pertaining to paying down debt are becoming particularly important for the U.S. government.
Though national governments do operate by a slightly different rule set than individuals — namely in that governments can raise taxes and can have their central bank expand the money supply (i.e. “print money”) to enable debts to be paid off using a devalued currency — the fundamental challenge is still the same: both individuals and governments cannot borrow forever, and thus must at some point make plans to deal with their debt and reduce debt burdens that are hindering progress and economic freedom.
With that in mind, here are steps you can take to create your own debt ceiling — so that you can avoid your own downgrade (in the form of a lower credit score) and not become a prisoner to debt:
1. Track Everything
Of course, that’s what Mint is here to help you do — easily and automatically track where every last penny goes. Tracking your expenses will help you see where you can cut down, thus helping you reduce outstanding debt as well as your debt/income ratio (outstanding debt divided by annual net income). The lower your debt/income ratio goes, the less susceptible you’ll be to a downgrade in your credit score, as financial adviser Janet Wickell notes.
2. Balance the Budget
Once you’ve got all your spending tracked so you can monitor your debt/income ratio, the next step is to find ways to “balance the budget” — to make sure you’re not spending more than what you have coming in. Start with your biggest recurring expenses and see if there’s a way to trim them. Can you negotiate a lower rent? Can you drive a cheaper car? Can you get a less expensive cell phone plan, cable package or insurance premium? Achieving a balanced budget is the first step in the path toward sustainably reducing your debt burden, and thus is a vital goal.
3. Renegotiate Debt
You can use a loan repayment calculator to get the ball rolling with reducing your debt, which should improve your credit rating. At this point, look for opportunities to re-finance your debt — in other words, re-package the debt into an aggregate deal at a lower rate. For instance, if you have a number of outstanding credit card bills that you have been diligently lowering and paying back, you may start to get offers inviting you to transfer your loans over at a lower rate. As a reward for your regular payments, a new banking institution is willing to pay your existing bill off, in exchange for you paying the remainder of the loan to them at a new interest rate — one usually favorable to you while still being worth the risk for the bank, to give you an incentive to take the deal.”Refinancing deals are a common way businesses can save capital or even grow,” says financial writer Jane Hodges. They can offer the same benefits for individuals.
4. Generate Rental Income.
If you have assets that you’ve purchased with credit — such as real estate or a motor vehicle — one way to reduce your debt is to rent these assets and turn them into a source of passive income.”If you want to earn more, work less, and have a decent retirement, you’re going to have to start creating income streams that do not require your direct involvement,” says financial planner Scott Allen. Income derived from renting or licensing property is one of the most practical ways to generate residual income, which in turn can be used to reduce your debt burden.
5. Generate Investment Income
As your debt gets lower and your credit rating continues to improve, you may have opportunities to continue to re-finance your debt at increasingly favorable interest rates. At the same time, be on the lookout for opportunities to lend capital at a more favorable rate. Mint users can use the “Ways to Invest” portal to find tools and services for investing according to their own investment style (active, low-maintenance or hands-off).
Of course, the challenge with personal finance is largely one of discipline: with this in mind, Mint has incorporated a “pay off debt” goal feature to help users stay disciplined and focused on their goal of debt reduction. By remaining vigilant about tracking spending, reducing debt, and re-financing when favorable terms arise, and you’ll be able to reduce your debt burden — whether you’re a nation, corporation, or an individual.
Simit Patel is an independent currency trader and the founder of InformedTrades. He resides in San Francisco, California. Simit Patel is a trader, writer, and technology entrepreneur. Simit blogs via Contently.com.