As President Biden announced his plan for Federal Student Loan debt relief this week, the topic is fresh on the minds of millions of Americans. 8 in 10 Americans have some form of consumer debt.
Mortgages, auto loans, credit cards, student loans, personal loans - chances are we will all hold some type of debt in our lifetime. Debt can be one of the biggest financial hurdles for many people. The more debt you have, the higher your monthly payments, the less money you have to allocate to other aspects of your life. Unfortunately for too many people, the line item on the budget that gets impacted the most is their own saving & investing dollars. A 2022 'Invest In You Student Loan Survey' conducted by Momentive found that 40% of people with student loan debt delayed investing to focus on paying off the debt. In my last post I talked about the importance of paying yourself first.
As you enter the distribution phase of your life, eliminating debt can be helpful to your overall financial picture. The less debt you have, the less your monthly expenses, the less the burden will be on your investment dollars. I wouldn't consider all debt, bad debt. For instance, if you have a low-
interest mortgage (especially in today's rising interest rate environment) it may not make the most mathematical sense to rush and pay that off. A well crafted financial plan, like our One-Page Vision Document can help answer those questions.
For the debt you do want to eliminate, there are two popular strategies. Probably the most widely recognized is the Debt Snowball Method, and the other is the Debt Avalanche Method.
The Debt Snowball Method
In the Debt Snowball method, you organize all of your debts by balance, and pay them off in order from smallest to largest. You make the minimum payments on everything, but focus your extra dollars on paying off the smallest debt. Once that debt is paid, you take the payments you were making on that bill and apply them to your next smallest debt.
You repeat these steps until your debt is eliminated. This method often gives people the most
emotional payoff. Because you are starting with the smallest debt, you will feel a sense of
accomplishment early on in the process as this will be the fastest to pay off. Paying off debt is often not the most exciting thing, so the Debt Snowball method can be good to help keep you motivated. However, it may not always be the most financially savvy way to pay off your debt.
The Debt Avalanche Method
With the Debt Avalanche method you organize your debt by interest rates. Similarly to the Debt Snowball method, you make the minimum payments on everything, but in this method you focus your extra payments on the debt with the highest interest rate. Once this debt is paid off, you take the extra amount and tackle the next highest interest rate debt.
While it may take you a bit longer to pay off your first debt with this method, you are often saving money in interest over the long run which can have an impact on your financial future.
The Bottom Line
When it comes to paying off debt, find the strategy that works best for you. If you need help, meet with a financial advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific investment advice or recommendations for any individual.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.