Debt management is an important skill to master, no matter what life stage you are in. As a senior, your financial situation has probably changed dramatically. You may not have the same debt obligations you did in years past, but you also may not have the same income. If you are retired, that means your income remains fixed even if expenses go up. Now, more than ever, you need to understand the difference between smart debt and dumb debt as well as understand debt management.
Smart debtSometimes, acquiring debt is unavoidable. Occasionally, it can even be beneficial. A debt that leaves you no worse off -- or even better off -- financially because it leaves you with an asset that was worth the cost of the loan is referred to as a smart debt. For example, a mortgage or student loan is considered smart debt. As a part of debt management, you need to understand the total cost of a loan (the principal, interest and fees) as well as whether the loan will help you or hurt you in the future.
Dumb debtA poor understanding of debt management can lead to dumb debt -- the easiest type of debt to fall into. Dumb debt occurs when you buy things on credit that you really cannot afford. It involves taking too long to pay off a debt so you pay an exorbitant amount in interest, sometimes considerably more than the original amount of your purchase. Dumb debt means paying for something long after you no longer use it or have it. A lack of debt management brings dumb debt with it; and that results in stress, a limited budget and sacrificing long-term financial goals.
Rising costs, fixed income.Living on a fixed income can be very challenging and requires skillful debt management. Inflation causes your costs to rise, plus healthcare becomes a bigger, and costlier, part of the equation.
Hopefully, a lifetime of disciplined debt management is paying off for you now. It is important to continue to stay on top of your debt. Even at this stage, dumb debt can be tempting. It can be tempting to use a credit card to pay for vacations and dinners out since these things may not be as affordable as they used to be. This type of poor debt management, however, would be an unwise choice.
Using home equityAlthough budgeting is your first and foremost line of defense, there is another source of income that you may not have considered. As a senior, you may have quite a bit of wealth even though you do not have much cash. Your wealth may be in the form of home equity. By using your debt management skills, you can access your home equity to help yourself financially.
Using a home equity loan or home equity line of credit may not be your best option at this life stage, however. It would add a costly monthly obligation through the loan payment. Instead, you can use a reverse mortgage. This is a debt management tool that can be very useful to seniors. It involves the lender making payments to you by turning your home equity into cash. The debt to the lender is repaid either upon your death or when you sell your house. Another option to consider is simply selling your home. You can downsize into a home that is much easier for you to maintain and may also be much more affordable.