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FEATURE – To get Getting rid of debt at any time is a great idea. After all, carrying a heavy burden of debt is known to cause various mental and physical ailments. Being strapped to a stack of bills leads to the loss of opportunities and options that can improve one’s life.
These problems are exacerbated when a person is willing or forced by circumstances to withdraw. Although an alarming number of people are doing this, going into retirement with debt is absolutely not advisable.
I often tell my clients, many of whom are retiring from government jobs, that reducing or eliminating debt is the first step to living happier, less stressful, and freer lives. But as most of us know, paying off debt can be a daunting task. Luckily, there’s a consistent rhythm to the process based on various factors that aren’t just paying the highest interest rates.
Traditionally, debt elimination has been referred to as the “snowball” or “avalanche” path. Both are easy to understand and implement, and are helpful ways to remove debt from your life.
The snowball and avalanche plans require you to list your debts and make minimum payments on all but one of those debts. The methods differ in choosing which debt will receive the additional payments.
If you choose the Debt Avalanche method:
- You make the minimum payments on all of your debts. Then use the remaining money to pay off the debt with the highest interest rate.
- This often results in lower payments over time.
- In addition to the higher interest rates, you may want to select a debt with an expiring “teaser” interest rate. Many credit card companies lure you away from the competition with temporarily low interest rates. Keep in mind that these are temporary interest rates or you may find yourself paying more interest than you need to.
Choosing the snowball method also involves making minimum payments on all of your debt. This time, however, instead of paying off the highest-interest debts, you pay off the smaller ones first. The snowball method may sound less desirable than the avalanche.
However, when you consider the psychological factors that influence our money decisions, you can see how the sense of accomplishment and progress can be very motivating. The debt snowball can keep you engaged and focused on debt reduction by shortening your debt list faster.
So which method should you choose?
You know yourself a lot better than I do. So what I’m going to say is that given that confidence, choose the method you’re most likely to stick with. Many experts feel that calculating the debt avalanche makes it the obvious choice because it will save you money and time. However, since most personal financial decisions are made with emotions rather than head knowledge, this may not work for everyone.
Like getting rid of a few extra pounds, reducing debt isn’t as fun or exciting. If you’re the kind of person who isn’t motivated by charts, graphs, and math but needs instant gratification, consider the snowball instead.
Throwing large wads of money at a high-interest debt and seeing it reduced just a little bit can be daunting for some people. If you know you’re the kind of person who needs a gentle nudge in the right direction and to see progress right away, then it’s okay to follow the snowball method.
On the other hand, if you’re interested in the big picture, love math, and are patient and consistent, a debt reduction avalanche plan has the potential to lower your monthly payments and save you big bucks in the long run. Of course, it’s always possible to create a “hybrid” plan to take care of your consumer debt like credit cards and then pay off things like auto loans, student loans, or other non-credit card loans.
- Reducing and reducing debt is always a good idea, whether it’s a snowball or avalanche approach.
- It’s important to understand your risk tolerance, motivation, and patience in order to create the most effective plan.
- Be balanced with debt.
Eliminating debt in your life is a goal worth considering. It will do a lot to bring you more wealth and peace of mind when you stop making paychecks. If you want more suggestions on how to eliminate debt, create more income for retirement, or if you’re a federal employee overwhelmed by the complexity of your benefits package, consult a trusted, licensed financial professional.
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