Outgoing? Get rid of these types of debt immediately
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To make sure you’re comfortable when you retire, it’s important to take the necessary financial steps. Feeling secure in retirement on a limited income—against the backdrop of rising consumer costs and inflation rates—may require tight budgeting.
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Considering debt when planning your retirement and taking steps to reduce and manage debt before retirement can ease the burden. In particular, certain types of debt must be settled before others.
There are three main types of debt you should try to eliminate before you retire: tax debt, payday loan debt, and credit card debt, according to The Motley Fool.
It’s a good idea to get rid of any outstanding student loan debt before you retire too, but hopefully those pesky loans from your college years are long overdue. Otherwise, get rid of them after these three most unpleasant types of debt.
1. Tax debt
The IRS can and will legally seize funds from your pension, 401(k), IRA, or any retirement account if you owe unresolved back taxes. In rare cases, it can also seize property. However, garnishing your retirement accounts is usually a last-ditch effort to collect taxes owed after a repayment agreement has not been reached.
You can mitigate this potentially dire situation by contacting the IRS directly and setting up a long-term payment plan. These plans have start-up costs, penalties, and interest that will have to be paid until you’ve completely paid off your debt, but at least your retirement accounts will be on a much stronger footing.
2. Payday Loan Debt
Payday loans are meant to serve as a short-term means of obtaining much-needed funds. But if they don’t get paid, they can absolutely decimate your finances.
Last year, CNBC’s “Make It” charted typical payday loan interest rates for each state. Although many states have capped rates on these loans (generally at 36% or less), more than 20 states have no such protection for payday loans.
That means payday lenders in states like Idaho, Nevada, and Utah can charge the whopping 652% interest rate — and Texas payday loan issuers can charge even more interest. . Texas has the highest average payday loan rates at 664%, or 40 times the amount of the average credit card interest rate in the state.
Payday loans should be a last resort for quick cash. If you can take out a personal loan to pay off any debt you owe payday loan companies, do it.
Paying off credit card debt should be a top priority, largely due to their high rates and revolving balance.
You should be able to call your credit card company and convince them to negotiate a lower rate for your cards or waive some account fees. With so much competition — and with credit card companies always trying to attract new customers — you should be able to reach a deal that will alleviate what you’re paying in credit card debt.
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Depending on the type and details of your debt, it may be smart to use a balance transfer-focused credit card to pay off the debt without paying interest during the introductory offer period.
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