When I was in college one of the first classes I took in the Financial Planning curriculum was Introduction to Personal Financial Planning. I distinctly remember a graphic the professor showed the class that demonstrated the different financial life stages. The stage that stood out the most to me was described as debt accumulation. The age range for this was your early 20s through your 30s; this is the time you are pursuing education and likely taking out student loans, buying your first car and taking out an auto loan, purchasing a home and taking out a mortgage, and then paying off these balances and building wealth in your 40s. This stood out to me because I saw so many problems with that static representation of life. What this chart didn’t take into account was adding in what we often see in reality, and that is what if you just can’t get ahead and you see your debt growing instead of shrinking?
How ever the debt came about, the result of too many payments and growing balances is often anxiety, stress, feelings of frustration, and general barriers to building your wealth. It can be overwhelming when you don’t know where to start or you feel like you are trying, but just not making progress. Our goal is to help you understand that you can get committed to making a change and developing a plan to reduce your debt.
Commit
I love the following definition of commit from Merriam-Webster: “to carry into action deliberately.” Commit to making a plan, budgeting money for your plan, and keeping yourself accountable. You also need to commit to spending within your budget so that you aren’t adding more debt.
Strategize
Developing a strategy and making a plan helps you focus on your goal and gives guidance on how to get there. If you are only making the minimum payments on each balance, take a hard look at your spending to see where you may be able to cut expenses to be able to put more resources into your debt payment strategy. This will allow you to make larger payments and see faster progress. Below are the two most common methods of strategies to attack your debt:
Snowball Method: With this method you begin by applying extra payments to your smallest debt first. When that account’s balance is zero, you will celebrate paying off one balance and then take what you were paying each month on that first debt and add it to the payment you were making on the next smallest debt. Keep repeating this cycle building the payment you are making on the smallest debt each time.
The Snowball Method May be right for you if:
Seeing little steps of progress is motivating to you
The sense of accomplishment encourages you to continue
You need to see progress to be incentivized to continue
Avalanche Method: Under this method you begin by applying extra payments to the highest interest rate debt first. After that is paid you will take what you were paying each month on that first debt and add it to the payment you were making on the next highest interest rate debt reducing the overall interest charges each month.
The Avalanche Method May be right for you if:
You can see the long term goal and will stay committed even if the progress feels slow
You have high interest rates that are adding more in interest than your payment covers
The amount you are paying in interest is causing you anxiety
Committing to a plan will keep you focused, encourage you to make progress, and allow you to see the path to being debt free.