Having to manage mounting debt can be very stressful. It can also be detrimental better health and overall well-being. That is, if your management approach is to look the other way, and hope for the best! As you consider all variables related to your financial future, your retirement and beyond, proper money management is truly important! Unfortunately, many of us behave as if ignoring what we owe will eliminate the stressful condition of our personal finances. If this picture already feels like a frightful cycle of avoidance and bad consequences, you’re quite possibly the protagonist of a very real scenario. It is time to take some action in the right direction.
In discussing the matter with clients who are in a similar situation, the patterns revolve around one of the two following avoidance arguments:
-They're on a guesstimated venture of paying some of their bills, based on self-determined formulas that they believe they can afford.
-By the time they get around to it, even when they've paid on all accounts for the month, at least 25% of their monthly bills are being paid after the established due date.
If this sounds like your situation, evading the reality of the size and condition of your debt is the wrong thing to do. Instead of making your debt go away, avoiding it will cause it to grow including mounting interest rates on the balances owed. Then, growing interest rates can often be exacerbated when it was a high-interest-rate account to begin with. As if that isn’t scary and enough, you also have to be concerned with the mounting APR (Annual Percentage Rate). According to a Bank of America report on the topic, this includes other fees like mortgage insurance and certain loan origination fees https://www.bankofamerica.com/mortgage/learn/apr-vs-interest-rate/
You can see the cycle unfolding here. This payment pattern becomes a problem that does not go away without proper action on your part.
What can you do to ensure that you’re managing and reaching your debt reduction goals?
Before going into the two payment methods proposed here, Investopedia offers some precautionary advice:
- You should stop using credit cards with high interest rates
- You should develop an individualized plan to pay down and payoff your debt.
I second the importance of both suggestions, and doing both as early as possible since, the fees you'll pay are a percentage of the [highest] or most current amount owed.
There are two debt payment methods that can ensure you’re making positive progress monthly, toward shrinking your overall debt:
The Debt Avalanche method and the Debt Snowball method.
Debt Avalanche method
Using this method will require making your minimum monthly payments on all active accounts that have a balance. The remaining amount of money set aside for bill payments, would then all go toward a higher-than-minimum payment of the designated account – the one with the highest interest rate. This process is repeated every month until that designated account has been completely paid off. In the same fashion the second-highest account then receives the higher-than-minimum payments for the month, until it is also paid off. Continue this payment pattern monthly, and be sure to make the minimum payments on all other accounts no later than their due dates every month. It is important to stress that when you aren't paying outstanding balances on or before the due dates, it will affect your credit scores negatively, so it is critical to set up a debt paying plan and schedule that enable you to employ the avalanche method correctly.
Financial advisors indicate that the debt avalanche method takes perhaps a few months longer to pay off, than the snowball method, but it is the one that truly saves you the most money in the end.
Debt Snowball method
This method on the other hand utilizes a “low hanging fruit” type of process. It involves paying off the smallest debt first, by paying as much more than the minimum monthly payment as you can afford, while also continuing to make minimum monthly payments on all other accounts with an active balance. Once that account is paid off, one would then assign the higher-than-minimum due payments to the next lowest debt on the list of monthly bills. The advantage to using this debt payment method is that it is easy to implement and eliminating accounts from the overall list of debts a little faster can be very encouraging to the average person.
Key Takeaways :
Left unaddressed, chronic unpaid debt can be detrimental to your physical and emotional health.
It is advisable to stop using high percentage rate credit cards right away.
While on a debt reduction process you’d want to refrain from using most of your credit cards as much as possible.
If you’re in great debt with student loans and are not able to make the minimum payment required for these loans, there are income-based programs available to reduce your student loan payments. Some programs are known to have eliminated the debt altogether for those who qualify. It would be wise to check this option out, if you still have outstanding student loans.
The Avalanche and the Snowball debt paying methods are both very effective. If needed, I strongly recommend that you seek the assistance of a financial professional as soon as possible.
If you’re interested in further exploring these two methods of debt payment and significant overall debt reduction, leave a comment here, or on the “contacts” page to talk more about your individual options with the avalanche or snowball methods of debt reduction. Remember, a little bit of patience with the process and with yourself, will make these easy methods the ideal solution for you!
Coach Mandy S.
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