How to Analyze Debt

Effective debt management is central to building wealth. Classifying debt by purpose and interest payments is important to this process. From there, you may put together a plan to reduce personal debt, while minimizing financial risks. Beyond merely saving costs, debt analysis enables you to incorporate leverage into the wealth-building equation. Be advised that carrying debt on your personal balance sheet introduces distinct risks.

Instructions

Classifying Debt

1

Order one copy of your credit report to summarize and review your credit history. As a part of the Fair Credit Reporting Act, you are entitled to one free credit report per year. You may order the free credit report from annualcreditreport.com. Verify that the information in the credit report is correct. If not, you should file paperwork to contest any discrepancies.

2

List your current liabilities on a piece of paper. Identify each lender and the interest rate being charged. Note whether the interest rates are fixed or adjustable.

3

Describe each liability as either good or bad debt. Good debt is used to build wealth, and often features tax-deductible interest. Mortgages and school loans are examples of good debt. Alternatively, bad debt is used for consumption spending at high interest rates. Credit cards may be described as bad debt.

4

Take financial inventory of your assets, income and expenses. Calculate the amount of monthly cash flow that is available to pay down debt. You also may consider selling off losing assets for cash, to make payments.

Applications and Debt Repayment

5

Telephone high-interest creditors to negotiate lower rates. Credit card companies are more likely to lower rates for customers that make timely payments.

6

Transfer balances from high-interest rate credit cards onto your other cards that still have remaining credit available, at lower interest rates. Credit card companies often extend special, low-interest rate offers to receive balance transfers.

7

Prioritize debt payments according to interest rates. Make the minimum required payments on low-interest rate debt, so that you may spend more money to eliminate the most expensive liabilities. Doing so cuts interest costs, while also allowing for financial leverage. Profitable leverage calls for you to invest money at higher rates of return than the interest charges associated with the underlying loan.

8

Monitor investment returns on assets bought with leverage, which may include real estate, stocks and business investments. Sell these assets, or aggressively pay off the leveraged loans, if asset returns do not exceed associated interest payments.