For many, the new year brings resolutions to pay debt, save more, or just get better with finances to improve their situation. All are admirable, and most folks get off to a great start, but don’t manage to stay the course. Investing in your debt is actually a tremendous return on investment. If you have a resolution to tackle your debt in 2023, this post will help you.
Now is a great time to focus on paying down debt. Mostly because we are just past the holidays when many people tend to accrue debt, but mainly because of interest rates. We are in a rising rate environment and an inflationary period. Thankfully, inflation is starting to subside, but the lenders who issue your credit cards haven’t noticed. Those who make their money providing credit and loans to borrowers are slow to reduce the rates charged. Just recently, I was working with a client who had a credit line that had a 29.99% interest rate. Luckily, a zero balance and not her credit line of choice.
If reducing debt is your resolution, consider the following to help you reach that goal. Many people make a classic mistake: paying their debts wrong. What I mean is that they are “hamster wheeling” – paying about the same amount every month and never making any real progress in debt reduction. Generally, this is done by slightly topping up what is paid on every debt. For example, they will round up all their minimum payments a few extra dollars or to make the payment even across all of their accounts (i.e., $43 becomes $45, or they pay $100 on a $90 payment). This is a waste of time and money. You have two choices that will yield much better results: snowball or avalanche.
If time is most important to you, i.e., how soon you can pay off a debt, use the snowball method. This is where you focus that extra cash you were using to “top up” your payments and pay off the smallest balances owed first. Thereby knocking out low-balance accounts over a shorter time frames and giving you a sense of progress and accomplishment.
Mathematically, the avalanche method saves you the most cash over time. Using avalanche, you pay the debt with the highest interest rate first. So, if the amount of money saved and the amount of money you actually pay back over time is most important, use the avalanche method.
For either method, stop topping up all of your minimum payments. Take the total amount of additional money over and above your minimums that you have been paying on each account and add it to either the smallest balance account (snowball), or to the highest interest rate account (avalanche), in addition to that account’s minimum payment. Be sure that you do not miss a payment or miss paying the minimum due on each account. When one account is paid off, take that account’s minimum payment, the total amount of additional money from all the top up payments, and add it to the next target debt.
If you need a visual on how this works, how much you can save, or how long it will take to pay off your debts, I invite you to become a client. I can show you how to structure your debts to save the most time or the most money depending upon what’s most important to you.
Restructuring how you pay your debt can feel odd at first. Breaking the inertia of our comfort zone and routine can take some getting used to. In the long run, the benefits are undeniable! Investing in your own debt opens that money up for future saving and investing and helps you reach financial freedom much faster.
Not sure how to start or what to do first. Call me. As an independent Certified Financial Planner™, I can help you with a savings goal, debt reduction, setting a timeline and evaluating resources. #talktometuesday #education #Hireaplanner #savings #savemore #payyourselffirst #FinancialIndependence #resolution #goal