Personal Finance 101: Managing Debt

Debt is both physical and emotional, because it not only affects both all physical finances and value, but also weighs on us through stress and uncertainty. A lot of this uncertainty comes from not knowing where you stand each month, and that is why a budget is so important to determine what you can and cannot spend.

But let’s be realistic, at some point in our lives most of us have debt, whether it is in the form of credit cards, student loans, mortgage, etc.

Question: So if you have debt, how do you go about paying it off?

Answer: There are many approaches to paying down debt, and here are three of them.

• Highest Interest: In this scenario, you pay off the debt with the highest interest rate first because it is costing you the most each month in money that is added onto your initial debt. Interest is where creditors make their money. Sure they are happy when you pay off your debt, because that gives them instant cash flow, but they are happy to accept the interest you pay them as well because it gives them a return on their investment!

• Snowball: In this scenario you pay off the debt with the smallest amount of money first. It gives you the good emotional feeling of paying off a debt and teaches good payment habits. With this debt paid, you can then allocate the money you were using each month to pay off this smaller debt and apply it to the monthly payment of your next debt, then you move to the third debt, etc.

• Consolidate: Some companies will actually purchase your debt and consolidate all your debts into one monthly payment. They may also provide a lower interest rate on your cumulative debt, but be very careful, there are companies out there that are scams. Do you research and contact the Better Business Bureau with any questions or concerns.