Debt is a major obstacle for many individuals and families—and when it’s weighing on your financial situation, it can be hard to move forward. High interest payments make it difficult to pay down what you originally borrowed, and saving and investing in your future often feel impossible when you’ve got debt in the way.
Whether you’ve got student debt, a high balance on your credit card or another form of consumer debt, Interior Savings can help. Here are a few different approaches to debt reduction and elimination—for personalized financial advice that considers your unique needs and goals, please contact our team.
Debt snowball
If you have a number of relatively small debts—for example, a bit of money left owing on a student loan, a lingering balance on a credit card or two, an outstanding amount on your last car purchase or another personal loan you haven’t quite paid down—it can be hard to know where to start. Sprinkling payments across various balances isn’t always a bad idea, but it’s often more effective to focus on paying them off one-by-one. You’ll see your progress, know that you’re getting closer to your end goal and hopefully, stay motivated.
With this strategy, start with the smallest debt first and work your way up to the biggest, allowing you to check items off the list methodically and more quickly than if you were making smaller payments across multiple accounts. (It should be noted that you’ll still need to pay the interest on your other debts—the focus will be on paying down the principal and interest on a specific debt in order to eliminate it completely.)
This is a great strategy if the interest rates on your various debts are similar—however, if you are carrying some credit card at 19% interest and a personal loan at 8% interest, you may want to consider the next strategy instead.
Debt avalanche
High interest rates can be financially devastating, so getting rid of this type of debt first is something we often recommend. Generally speaking, credit cards and cash advance loans are at the top of the list—though some high risk personal loans aren’t far behind. Other debt, such as lines of credit or personal loans through a reputable financial institution, may involve significantly lower interest rates. These are the ones that can go to the bottom of your list—you want to pay them off, but they can wait!
With this strategy, compare all of the interest rates you’re paying—it’s possible that some are much higher than others. If this is the case, tackle the high interest debt first and then move on to the second highest interest rate. Not only does this provide a sense of direction and give you a clear plan to tackle various debts in order, it will reduce the total amount of interest you’re paying over time by eliminating the most expensive debt first.
Debt consolidation
Debt consolidation is when you bring all of your debts together to form one sum with a single weekly, bi-weekly or monthly payment towards the balance (principal and interest combined). This strategy typically involves taking out a debt consolidation loan or using a line of credit with a manageable interest rate. While this approach works very well for some clients, it can be dangerous for those who struggle with overspending or staying on budget. Before you go this route, speak to an advisor and ask yourself an important question: can you prevent yourself from acquiring new debt while those same channels, like your credit card, are available to you? An honest answer may be the difference between becoming debt-free or falling even deeper into the red.
At the end of the day, it’s important to remember that debt is incredibly common and nothing to be ashamed of. There are solutions to help you reach the other side, and we’re here to offer guidance and support every step of the way. To learn more or get personalized debt management advice, please contact us. Our team of experts is here with advice that’s proven, achievable and judgement-free. We look forward to speaking with you!