Managing Debt

How do you know when you’re carrying too much debt?  Well before you start losing sleep at night or feeling it in the pit of your stomach, you may be overloading your credit cards without even realizing it.  Debt is generally considered:

  • Manageable when you have enough income to pay your debt and cover your living expenses with some left over to save
  • Uncomfortable when you have to tighten your belt to make ends meet
  • Difficult when you do not have enough income to meet all your monthly expenses
  • Punishing when you are forced to borrow into deeper debt to meet your ongoing obligations.

If your debt load is making you uncomfortable, read the next paragraph to learn how you can reduce it as quickly as possible.  If it is difficult or punishing, you may need outside help to get back on track. Contact us for a free 30-minute consulatation.

Managing Uncomfortable Credit Card Debt

Paying off high-interest credit card debt is usually the first step most people take toward regaining control of their financial lives. When your rid yourself of credit card debt, you can free hundreds of dollars every month for more important things – like savings. First hide your card credits; then choose between two popular debt repayment methods commonly known as snowball and avalanche.

Debt Snowball

Following the debt snowball technique, popularized by radio talk show host Dave Ramsey, you pay off your smallest debts first. He recommends making minimum payments on all other debts while throwing as much money as you can toward the smallest. Once you pay it off, apply the same monthly payment toward the next smallest and so forth until you’re debt free.

Debt Avalanche

Using this method, you pay off your highest interest debts first. Line up all your debts in order from the highest to lowest interest rate. Make minimum payments on your lower interest debt while paying as much as you can toward your highest interest debt. Once you pay off the first debt, apply the same monthly payment to the next highest interest debt and so on until you’re down to zero.

The snowball approach provides the psychological boost of paying off your first debt and the momentum to stick with the plan.   However, if your smaller balances carry lower interest rates than other debt, you’ll end up paying more interest over the long run. With the avalanche method, you’ll pay less interest, but it may be tougher to stay motivated, especially if the first debt has an especially high balance.

If you can stick to the avalanche plan, we recommend it. The sooner you eliminate high interest debt, the more money you’ll have availabe for other things, like savings.