By Koach
April 17, 2019 // 4 min read

The Do’s & Don’ts of Debt

Debt. The dreaded financial term that is often misunderstood and misused. It’s the backbone of the global economy and of our personal lifestyles. Without it you’d have to save up for years to buy a car and decades to buy a home. But when we have to use debt for our daily expenses like groceries and fuel for the car, it’s a telltale sign things need to change for you financially. According to the Federal Reserve, outstanding U.S. consumer debt just crossed the $4 trillion mark earlier this year. That’s trillion. With a T. Let’s put this into perspective. If someone gave you 4 trillion one dollar bills to stack on top of one another, the thickness of that stack would reach from here to the moon. And when you got there, you could circle the moon itself nearly five times with the remaining thickness 😱.

So what can we do about it? Well, for starters, don’t attempt to pay down your debt before building up a safety net of savings first. Now you might be thinking “why would I put money into a savings account that earns pennies of interest before paying down debt with 24.99% APR?” Great question. Without any savings, you’ll more than likely have to add more, high interest rate debt to your plate when emergencies happen (and we know they do). Be sure to read our previous blog posts here to get caught up on why this step is so important. Once your safety net is in place, it’s time to figure out which debts you should prioritize paying off first. There are a couple methods you can consider. Here’s the key details on each.

Debt Snowball

The debt snowball method is perhaps the most psychologically rewarding, and the approach is quite simple. Just like that awkward family photo you once took, order your debt from the smallest outstanding balance to largest. Then take every excess dollar above and beyond your monthly living expenses and prioritize paying off the debt with the smallest balance first. Once that debt is paid in full, roll your payments forward into the next debt with the smallest balance. Rinse and repeat until your debt ends in defeat.

Debt Avalanche

Now, the debt avalanche strategy is the most mathematically cost efficient approach. Using this method will guarantee you pay the least amount of interest possible. To do this, order your debt from the highest interest rate to lowest. Then prioritize paying off your highest interest rate debt first, and just like before, roll your payments forward into the next debt with the highest interest rate as each one is paid off. Whether you use snowball or avalanche, consistency is key. And before you know it, you’ll be debt free. Have to agree, Dr. Seuss is the true G 🙂.

Paying off Student Loans

Aw... student loans. The ultimate "investment in yourself" with the expectation of a future financial return. Hopefully they helped you land and keep a good paying job. But if they didn't, you still have to pay them back. Once you get your high interest credit card and personal loan debt under control, then it might make sense to plan a financial blitz to pay your student loans off quickly. But... that may not be the best option depending on your student loan interest rate. Perhaps prioritizing financial investments to take advantage of long term growth and compound interest (more on this topic in our next post) makes more sense. Or maybe you have other life goals that are a higher priority, like starting a family. If eliminating your student loans isn't top priority, that's OK. Do you. But don't ignore your student loans because they are a disaster to clean up on your credit report. Never miss a student loan payment! If you are struggling to keep up with your student loans, look into income based repayment plans or even request deferment where you can delay payments for a certain amount of time. There are a lot of options to tackle your student loans and a financial Koach can help you develop a plan that is right for you. Simply download the Koach app from the App Store or Google Play Store.

Tackling your debt can be overwhelming and stressful but you don’t have to do it alone. Koach Financial can help you find the right balance between paying off the past, preparing for the future, and not miss living in the present.