If the thought of debt sends you into panic mode, you’re not alone. Many individuals across the U.S. are experiencing financial stress and anxiety. According to the Federal Reserve, the U.S. consumer debt hit $14 trillion in the first quarter of 2019—which has already exceeded the first quarter of 2018’s total.
Though debt may be normal, it can easily perpetuate stress if ignored. Whether it is managing credit card debts, medical debts, or student loan debts—there are strategic approaches you can take to set yourself up for financial freedom.
Today, we discuss debt-repayment strategies and suggested methods for choosing what loan to pay off first.
Strategy #1: The High-Interest Approach
You’ve likely heard that paying off your debts with the highest interest is the best way to reduce your overall debt. This is because your debts with the highest interest cost you the most money for your monthly payments. If this kind of debt is also your largest payment, you may end up feeling that you’re making little to no progress on your debt-free journey. In this instance, it’s important to evaluate whether or not you need to see quick progress to alleviate your financial stress.
If quick progress is what you’re seeking, debt-repayment strategy #2 may be just what you’re looking for.
Strategy #2: The Snowball Method
In our last article titled ‘How much should I save in my 20s, 30s, and 40s?’, we discussed the Snowball Method. If you have yet to read it, we’ll fill you in here.
The Snowball Method is a traditional debt-repayment strategy that will make you feel like you’re making progress toward becoming debt-free. You’ll begin by paying off the lowest balances to the largest balances, regardless of the highest interest rate, until you’re without debt. However, a negative effect of this debt-repayment strategy is that you’ll be paying interest payments on the larger debts. Consequently, you’ll be required to pay more in interest in the long run.
If paying less in overall interest sounds ideal to you, debt-repayment strategy #1 may be your winner.
Create a repayment plan that works for you
When tackling your debt, it’s important to make payments that are affordable. Consider taking a close look at your current budget and be realistic. Prioritize payments according to what is of high importance such as your necessities. While you consider just how to allocate your remaining finances, you can use expense-tracking apps to gain a clear understanding of what you can put toward paying down your debt.
Work with a financial advisor
Managing your debt is not always easy and that’s why there’s additional help you can pursue in your debt-repayment process. Credit counseling, created to help consumers with excessive debt avoid bankruptcy, teaches basic financial concepts, budgeting tips, and methods to manage money wisely. If there are questions you have or advice you need, Certified Credit Counselors can strategically guide you through the steps to achieve financial freedom.
Learn, grow and focus on your financial goals
With over 133 years in the financial industry, we’ve put our customers on the fast track to financial success. For more on our services and to get in touch, visit us here.