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Personal Financial Planning - Effective Investment and Debt Policies

Even if you begin a program for repayment of consumer debt, the cycle goes on. How do you stop spending and eliminate debt once and for all? Once you realize that living debt-free is the best way to ensure a secure future and comfortable retirement, the best investment and debt policies become apparent -- and manageable.

The conflict is between two ways you can use your money. The advice you hear often is to put a set amount away every month into a safe investment. The conflicting advice is to pay off your credit cards and then cut them up and never use credit again. Both of these suggestions are flawed because they conflict with each other. Spending habits sabotage your best intentions. Here are a few suggestions for how to overcome the problem:

1. Stop using your credit cards. Keep them and use them for occasional expenses just to keep them active. But otherwise, get into the habit of paying cash or using a debit card. (And by the way, restrict yourself to a debit card that does not allow you to overdraw your account.) This easy step -- putting credit cards aside for your day-to-day expenses -- is an effective way to begin ending the cycle of living beyond your budget.

2. Pay down credit card balances as aggressively as possible. Don’t just make the minimum payment, but get rid of the entire balance as quickly as possible. This works only if you stop using the card, so the first step above has to be in place and followed every month.

3. As your debts begin to evaporate, begin a program of investing cash every month. Make this a part of your budget and stick with it. When you eliminate a debt and its monthly payment, increase your monthly investment budget by that amount.

4. Accelerate your mortgage payment. This is one of the best investments you can make. The extra payment “earns” a compound rate of interest equal to the rate you pay. This works in the sense that you reduce future interest every time you make an extra payment, and this accelerates your repayment for every month into the future. With a $100,000 mortgage at 5% over 30 years, adding $50 per month to your payment takes five years off your term.

5. Make sure you have protected your flanks. Financially speaking, your flanks are your vulnerable spots. What happens if you lose a job or become ill? You need a few additional financial safety nets, including an emergency reserve fund and all of the essential insurance coverage: Homeowners, life and health at the very minimum.

Many people might think of this list of five steps as obvious. That might be the case, but how many people are following this plan? That’s the question worth asking. The truth is, most people do not have an effective long-term plan or, if they do, they are not following it or taking the steps they need. Once you begin putting the plan into action, you ensure your financial freedom now and in the future.