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How to pay down high-interest debt

First National Wealth Management

How to pay down high-interest debt

Joe Dylla
In House Counsel

We’re now a fourth of the way into the year, so what better time than the present to have a checkup on your 2023 financial resolutions?

I hope you’re still committed to your New Year’s resolutions, creating new habits, and thriving — but if not, you still have the vast majority of 2023 to turn things around!

Every year, one of the most common resolutions involves getting your financial life in order. And according to a survey from Forbes Health and OnePoll, 2023 was no different.

After making improvements to physical and mental health, improving finances was the most common response (30%) and was a consistent resolution across the surveyed age groups.

If you’re one of the many people who made financial resolutions this year, then you may or may not know that paying down debt is one of the most fundamental ways to improve your finances.

And what’s the best place to start? With high-interest debt. So, let’s get into it:

What is high-interest debt?

There is no exact threshold for high-interest debt, but a good starting point is anything greater than standard mortgage rates.

The best example of high-interest debt is credit card debt. Some student loans and other types of loans can qualify as well.

Now, it should be noted that not all debt is created equal.

High-interest debt makes saving, investing, and building long-term wealth much more difficult, if not impossible, and typically doesn’t facilitate the purchase of assets. Contrastingly, a mortgage facilitates home ownership, and student loans create increased earning power — both of which generally increase long-term wealth.

Two strategies for paying down high-interest debt

Snowball:

In the snowball method, which was popularized by Dave Ramsey, you start by listing all of your debts — regardless of interest rate — from smallest to largest.

Then, you pay the minimum payment on all but the smallest debt, and you put as much additional money toward that smallest debt as your budget permits.

After the smallest debt is paid off, you move on to the second smallest, rolling your high-interest debts into a snowball until all of them are paid off.

Avalanche:

With the avalanche method, you list all of your debts in order of interest rate and pay the minimum payment on all of them, but you pay as much additional money as your budget permits to the debt with the highest interest rate (regardless of the size of that debt).

After the debt with the highest interest rate is paid off, you move to the debt with the second-highest interest rate, creating a downward avalanche that ends when all of your debts are paid off.

Which strategy is right for me?

Both the snowball and avalanche methods have their benefits and drawbacks. As experienced financial professionals, our team endorses either approach.

In your case, the most important thing is to determine which method you can follow on a consistent basis to meet your goals. Identify which one that is for you, and then ingrain it into your financial life.

Regardless of which method you choose, just keep paying down those high-interest debts, and take control of your financial future!

And, if you’d like to discuss your financial situation with one of our Wealth Advisors, send us a note.

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