Financial Planning For Couples: Dealing With Debt
Chances are good that one or both of you will have brought some form of debt with you when you entered into your relationship. You may also have accrued some debts together, or racked up more on your own since.
Of all the financial issues you’ll deal with as a couple, debt is one area where you can have the most disagreement.
If you’ve been careful to accumulate little or no debt, you may feel resentful about helping to pay off your partner’s debt. On the other hand, if you owe a lot more than your partner, you may feel guilty about having him or her share the burden and be reluctant to use joint funds to pay them off.
What do you do in situations like that? There’s no right or wrong solution, as long as you can come up with a plan that you can both agree on.
How do you tackle your debts?
You need to figure out how you’re going to tackle debt together. Are you each responsible for your own debts? Or do you want to pay them off together? Are you comfortable helping your partner pay down a student loan, but not a credit card balance?
You’re likely to pay it off a lot faster if you tackle debt together, and you can potentially save hundreds or thousands of dollars in interest by doing so. No matter who racked up the debt, it might make more sense financially to combine your balances into a low-interest loan or line of credit and then pay off the loan together.
If you do combine your debts, be sure to have at least one credit card in your own name.
If you feel strongly about paying off personal debts individually, though, then do it. Just be clear on where the funds will come from to pay down the balances.
Keep in mind that your debts could be dragging down your credit score, which will make it more difficult to get a mortgage or other loan in the future. The lower your score, the tougher it is to get credit, and the more you’ll likely pay for it.
Prioritize your payments
When prioritizing your payments, you want the worst offenders at the top of your list – the creditors who are charging you the highest interest rate. These are usually your credit cards.
You’re not going to stop using credit cards. They’re convenient and you like the perks – frequent flier miles, free gifts or cash for a certain number of dollars spent. What’s more, they have become a necessity in today’s world. It’s nearly impossible to book a hotel without a credit card, or purchase an airline ticket, or rent a car, or shop online.
Constantly carrying a balance, however, is an indication that you are overspending on a regular basis and using your credit cards to supplement your income by spending money you don’t have on items you don’t need.
Generally speaking, you’ll want to put as much money as possible towards paying of your high-interest balances as quickly as you can.
It’s worth cutting your spending, or even putting a little less into your savings temporarily, to pay these obligations off faster. However much you choose to put towards that debt, just make sure you aren’t adding to it. It’s usually too much spending that keeps people from reaching their financial goals.
For an eye-opener, use this online calculator to analyze how long it will take you to repay each debt if you continue to just make the minimum payments.
Get your interest rates down
Try to lower the interest you are paying on every credit card balance you have. You have a good chance, especially if you’ve had the card for a long time with a good payment history, but you have to ask.
You can use the balance transfer offers you get in the mail for leverage. Or, switch the balance to another card offered by the same bank that has a lower rate but fewer bells and whistles.
Make it clear that you don’t need extra features such a reward points. You’re not going to use this card for purchases – you just want to pay off the balance.
What about “good” debt?
What is “good” debt? Sometimes borrowing money now may actually help you make more money in the long run.
Taking out a mortgage to buy a home, for example, can more than pay for itself if the home goes up in value over the long term.
Getting a student loan to attend university may be worth it if you know the degree will help increase your earning potential over your lifetime. It’s an investment in yourself.
Interest rates are generally low – sometimes tax deductible – and ideally the return you get on whatever you used those borrowed funds for – home, university degree, or you own business – will more than compensate for any interest you pay for the loan.
You should still make a plan to pay these off even if it’s more slowly.
Should you refinance your home?
Borrowing against your home with a second mortgage or home equity loan is not always a good idea.
People typically refinance their home to lower their monthly payments (potentially a good move) or to put cash in their pockets by pulling out equity (potentially a bad move).
Although many people say they’re going to use the money to fix up the house, which can improve its value, or pay off some old bills, which reduces bad debt, more often than not they spend it on a lavish vacation or a new car.
If you do refinance with the intention of taking equity out of your home, make sure you do so for a specific purpose. Refinancing can be an effective tool for achieving a goal of eradicating bad debt, leaving you only owing money on your real estate.
Merely racking up more credit card balances by continuing to live beyond your means negates any gains made.
Borrowing with the assumption that interest rates will stay low and your home’s value will continue to increase can be a mistake.
What about lending money to family and friends?
Be smart when lending money to friends and family. It may seem awkward but you need to treat the transaction as a business deal, complete with a formal contract in place outlining how much is owed, when it must be repaid and how much interest you are (or aren’t) charging.
This creates accountability and increases the likelihood that you’ll actually get paid back. Without one you are setting yourself up for a lot of potential trouble down the road. Friendships end and family feuds begin all because of well-intentioned loans that go unrecovered.
Final thoughts
Whether you’re trying to pay off a line of credit from your bank, credit card balances, student loan, or a personal loan you took out to cover the costs of a car or a vacation, dealing with debt as a couple can be tricky – especially if one of you owes a lot more than the other.
You may have different ideas about how much debt is too much, what kind of debt is okay, and what is off limits. You need to figure out how you’re going to tackle this together.
Always keep a close eye on your credit score, as it has a direct impact on your ability to take out a mortgage, credit card or other loan and on the interest you’ll pay for it.
The idea here is simple – the faster you can eliminate your debts, the further along you’ll be on the path to financial freedom.
Further reading on Financial Planning for Couples:
