Almost everyone in America carries some sort of debt, yet not one single person enjoys doing so. If you had a choice to buy a car in cash or take on debt, everyone would use cash. So why do so many people have debt?
Here is the “justification” answer that I imagine many are thinking about – Why use my cash if I can finance it at 2%? That’s valid. If you have a car loan at 2% and your savings account gets 3%, then it’s better to keep that money in your savings and finance the car.
Here is the “real” answer – You can’t afford it! Ok, ok, that may be a little harsh, but it’s true. We are starting to see some of the same signs that we saw back in 2008 of people who are getting a little “over-leveraged” or have taken on too much debt. People are buying second homes or “rental properties” with the expectation that it’s easy to find renters. People are maxed out on their credit cards because they will “pay them off with the annual bonus or tax return.” Again, the expectation of that happening.
So now that we are in this hole, how do we dig out as quickly as possible? Below are a few strategies that I have implemented with clients to help them rid debt as quickly as possible. This is not an end all, be all, however, use it as a guide point for your situation.
- Write a check – This is low-hanging fruit, but I am taking it. Do you have the cash to pay it off? Pay it off then, but don’t use all your cash. Keep some for a temporary emergency fund and use the free cash flow from paying off the debt to build it back up quickly.
- Debt Snowball – Attacking the lowest balances first. This is my second favorite strategy because it gives people small wins to build the momentum of getting somewhere. Build in a debt budget – how much you can contribute to paying off debt each month.
- Debt Avalanche – Attacking the highest interest rates first. I am not a huge fan of this, not because it doesn’t make financial sense (it does, totally), but often I see the highest interest rates are also the highest balances and it can be a struggle for many families to do this because it takes some time before they see any dent in their balance.
- Future Spend – This is my favorite, and it’s one that only my clients have known about until now. Create an account at a separate bank. Decide on your debt budget. Contribute the difference between your minimum debt payments and debt budget to this account (i.e. the minimum payment is $500 and the debt budget is $1,200 = $700 to Future Spend). Create the habit of saving, put the money out of sight which is also out of mind, and use the money to pay down debt a few times per year (every quarter or every January/June for example).
With these tools, you now have a roadmap of how to get out of debt. Own it and do your best to pay it off before this next downturn in the economic cycle. You will be glad you did. Just make sure you start saving that money once your debt is paid off.
Email me at email@example.com and let’s see which debt plan is the best for you, financially. There may be another option out there that is a little more uncommon and may just be the best decision you ever made!
Joie de Vivre!