Paying Down Your Debt

Debt is a normal part of life for most people. Paying down debt saves money in the long run by avoiding interest payments.

Know what kind of debt you’re dealing with

Good Debt versus Bad Debt: Good debt can help boost your financial position – like buying a home or a student loan for education costs. These debts may also be tax-deductible. Bad debt is usually in the form of credit card debt or a personal loan. These debts don’t improve your financial position if you can’t pay them in full within a month or two. You should tackle bad debt first.

Decide how you’d like to approach paying down your debt

Figure out what will give you the biggest boost: Avalanche Method or Snowball Method

The Avalanche Method focuses on paying the highest interest debt first, minimizing your interest payments over time. This approach works best if you feel confident following through on your pay down goals, have high interest debt, and want to minimize the amount of interest you pay. Example: putting $500 towards a $3,000 credit card bill with an 18% interest rate will save you far more than paying off a $500 bill at 6%. It may take longer to see progress when using the Avalanche Method so if you want some small quick wins, the next method may be a better fit for you.

The Snowball Method focuses on paying off your smallest debt first, building confidence in your ability to pay off your debts. The benefits of the Snowball Method is that it gives you small successes in the beginning giving you motivation to pay off the rest of your debt. It also helps minimize the number of you bills you receive as you pay off smaller debts. The Snowball Method can be a good fit if you have several small debts to pay off or if you need motivation to pay off a lot of debt, but you’ll probably end up paying more over time. The Snowball Method doesn’t take interest rates into account so you could end up paying off high interest accounts later.

Regardless of which method you select, the most important factor is committing to take control of your debt.

Additional Tips:

Avoid paying late fees

Things happen and if you find yourself struggling to make a payment, call the lender and let them know. It doesn’t hurt to ask. Prevent this by making debt payments a priority, especially over luxury items.

Track your expenses

Knowing where your money is going will help you see if there are any changes you can make. There may be some items you can cut out temporarily as you focus on paying down your debt.

Consider consolidating debts

Consolidating debt combines multiple debts into one balance, interest rate, and payment. This can sometimes lower your interest rate and/or minimum payment freeing up money to pay down debt faster.

Redirect payments

As you pay off debts, don’t slow down. Redirect those payments to the next debt you want to tackle. Making extra payments will accelerate your progress.

Create a debt policy

Make a debt policy to avoid adding more debt. A debt policy outlines when you will (buying a home) and will NOT (go on vacation) add new debt.

This article is provided for informational and educational purposes only and is intended to be used as a guide for planning. It should not be construed as investment, tax, financial or other advice. Data and other information provided by third parties are believed to be obtained from reliable sources, but we do not guarantee the accuracy of such information. Investing in securities involves the potential for gains and the risk of loss and past performance may not be indicative of future results.