Debt management is an important skill to master, no matter what life stage you are in. As an empty nester, your life has probably changed dramatically. After having kids in the house for many years, they are suddenly gone and on their own. Your retirement may be just around the corner. Understanding the difference between smart debt and dumb debt, as well as understanding debt management, has never been more important.
There are times when debt is necessary, and, on occasion, beneficial. Typically, what is called a “smart debt” is one that leaves you better off financially, because you have an asset that was worth the cost of the loan after you pay it off. For example, a mortgage or student loan is considered smart debt. As a part of practicing good debt management, you need to understand the total cost of a loan (the principal, interest and fees) as well as whether or not the loan will help you or hurt you.
Dumb debt is the easiest type of debt to fall into. It usually results from poor debt management. Buying things on credit that you really cannot afford; taking too long to pay off a debt so you pay an exorbitant amount in interest, sometimes more than the original cost of the item); paying for something long after you no longer use or have it – these are all examples of dumb debt. Because of poor debt management, dumb debt results in stress, a limited budget and the sacrifice of long-term financial goals.
Kids gone, but not out
Even though your children are out of the house and beginning their own careers, you may still have some financial obligation to them. For example, perhaps you are helping them pay off their student loans, or you plan to assist in paying for an upcoming wedding. You need a clear idea of responsible debt management to make sure you handle these expenses smartly. You have the following options for repayment plans if you use PLUS loans (federally sponsored education loans for parents):
- Standard: fixed payments throughout the term
- Graduated: payments that start low and gradually rise
- Extended: payments over a longer timeframe
- Consolidated: simplifying multiple loans into one
Choose the option that does not leave you repaying the loan during your retirement, when your income will be fixed. This step toward debt management can help alleviate some financial burden in the future.
If you plan to pay for a wedding or for a down payment on a house for your kids, set some money aside in an account that is easily available. If you need it to help your kids, it will be there for you. If they wind up not needing your help after all, then you have extra savings for your retirement or a vacation.
Your own parents
Your own parents may be in more need of help at this stage. Careful debt management can help you prepare for this. Talk with your parents so you know what financial resources they have available to provide for their needs. This can help you manage your debt so you know how much they have for their needs and how much you may need to contribute. Although these conversations can be difficult, they are a necessary part of responsible debt management.
Downsizing your home
The home that met your needs for many years may now seem cavernous. It may also cost too much to maintain, and come with too large a mortgage payment. Consider downsizing, a great step in debt management. Buying a home that is smaller and less expensive may make it easier for you to save for your rapidly approaching retirement. You can use the home equity in your current home toward the new house to make it cost much less, or you can split it up and use some as a down payment and some as an injection into your retirement savings.