4 Steps to Eliminating Debt

With the beginning of the new year, we all set goals and create resolutions to help us live our best lives.  

One of the most common financial goals that we encounter is to expedite debt payoff. Debt is the most common financial issue among American households, and too much can create incredible stress and anxiety.  Proverbs 22:7 tells us, “The borrower is slave to the lender.”  There are several criteria to consider before incurring additional expenses, but that’s a different post for a different day. With these thoughts in mind, consider the following tips to eliminate the debt in your life:

1. Set a goal for when you’d like to be debt-free.  

This is the first and most important step.  If we begin with the end in mind, we can then back into the monthly cash flow needed to eliminate debt by your goal date.  Write your goal down, communicate your goal with a trusted advisor, friend, or family member to create accountability.

2. Create a list of all debts that you currently have.  

Make sure to include overall balance owed, interest rate, and the monthly payment.

3. Determine the order of debt payoff.  

There are two separate methods that can be utilized to expedite debt payoff:

  1. Avalanche method – This method recommends paying off debt in order of interest rate.  You want to start with your highest interest debt first, and then work in order until you reach your lowest interest rate debt.
  2. Snowball method – This method recommends paying off debt in order of amount owed.  You want to start with the smallest amount owed, then work in order until you reach the debt with the largest amount owed.

Pro Tip – Both methods are useful and can assist you in your goal to pay off debt more quickly.  Typically, the avalanche method can help you to save more money in interest over time, because you are paying off the highest interest rate loans first.  However, the snowball method can sometimes be more effective due to its influence on your “money behavior.”  Oftentimes, the snowball method will allow you to eliminate one debt early on, creating confidence in your plan forward.  There isn’t a right or wrong answer when it comes to your strategy – select the one that works for your situation!

4. Implement your plan!  Now that you’ve decided on the best payoff method for your situation, you can get started.  

Assuming you have established an emergency fund, you can begin applying additional cash flow to the first debt.  Once this debt is paid off, add that payment to the next debt, and continue all the way down the line.

Pro Tip – We often get asked whether someone should expedite debt payoff or begin/increase their savings rate.  The answer depends on the situation.  For some, the answer may be a balanced approach.  For others, it may be best to concentrate on one area at a time.  If this question applies to you, don’t hesitate to reach out for assistance.

Ideally, these strategies will help you to eliminate consumer debt quickly and be completely debt-free by retirement, freeing up cash flow for things that are important to you.  Best of luck on your resolutions!

Clark Hayden, CFP®*

Financial Advisor, Partner, CFP®