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Personal Financial Planning - Setting Your Own Debt Goals

How do you escape debt once and for all? Living debt-free is the best way to ensure a secure future and comfortable retirement, but it is easier said than done. However, the best investment and debt policies become apparent—and manageable with five basic steps.

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 emergency expenses. 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 quickly as possible. Don’t make only the minimum payment, but get rid of the entire balance. 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 investing cash every month. When you eliminate a debt and its monthly payment, increase your monthly investment budget by the same amount.

4. Accelerate your mortgage payment. This is one of the best investments you can make. This reduces future interest every time you make an extra payment, which 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 set up contingency plans. 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. 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.

Michael C. Thomsett is an instructor with the New York Institute of Finance. He teaches three options courses: “Swing Trading with Options,” “The Amazing World of Options,” and “Synthetic Options Strategies.” He is also an investing and options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com. Thomsett’s latest FT Press book is Trading with Candlesticks. He also contributes to the CBOE newly-formed blog.