Debt is a perennial issue. To some degree, we all live with debt. Most folks who seek out financial planning are usually very good with debt management. However, we all need help from time to time. Basically, there are two top strategies: snowball, and avalanche. If you have extra money or are "topping up" your debt payments on multiple accounts, stop doing that and channel the cash in a more productive approach toward one debt. Let’s review both methods and get a third tip for handling debt now.
Our first way to tackle debt is the snowball strategy, you tackle the smallest debts first. Take those extra "topping up" payment amounts from other debts and apply it all to your smallest debt, plus its minimum payment. Paying off the smallest debts first can be a psychological win for many folks and motivate you to pay down more debt. If speed is your goal, this snowball approach is a winner.
Next, we have the avalanche method. This second method actually saves you the greatest amount of money over the debt pay down timeline. With the avalanche method, you tackle your highest interest rate debt first. You take those extra "topping up" payment amounts from other debts and apply all of it to your highest interest rate debt, plus the minimum payment. By tackling the highest interest rate debts first, you retire those debts faster, thus, saving on the amount of interest paid.
Remember, with either approach, do not skip any minimum payments! Skipping or missing a payment can affect your FICO score. Speaking of FICO, now would be a great time to check your credit report. Pull your full credit report and review it for inaccuracies. Look for any unusual lines of credit, unusual addresses, or incorrect or mismatched data. You can use a services like Credit Karma or Credit Sesame.
Finally, with debt in the current interest rate environment, it might be a good move to consider a personal debt consolidation loan. If you are carrying higher balances on your credit cards, shop for a loan that will have a much lower average rate than the average rate on your credit cards. With current interest rates, you are most likely being charged much higher interest on your credit cards. According to LendingTree, the current average rate is 24.66%. This is the highest average rate since Lending Tree started tracking this metric in 2019. The lower your credit score, the higher the interest rate. This means if you are carrying a balance, paying that balance off is a smart financial return. Currently, as of this writing, we're not earning a higher return in the markets so eliminating high-interest debt is a must.
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 #snowball #avalanche #loan