Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

At the end of 2019, American consumer debt hit a high of $4.17 Trillion! Of that total, $1.5 trillion is student loan debt. That number is a tough pill to swallow, but on the individual level, feels unavoidable. The average student in 2017, graduated college with $28, 650 in federal student loan debt. That is a pretty daunting number!

Most students leave college without having a job offer and no real hand-on skills that a corporate job would provide. So having enough income to keep up with current expenses can be a big problem. This gap in income versus expenses can create additional debts that only add to the struggles. Not having immediate income means they can’t afford a car- so then those students add some car loan debt. In addition because students only have enough income to meet current expenses, they don’t have any extra money for discretionary spending- so they add a couple of credit cards onto the tab, resulting in even more debt.

Currently, the three biggest sources on consumer debt in America are student loans, car loans, and credit card debt.

It’s not the fault of the hard-working students. U.S. colleges have let tuitions get out of control, while masking student loans as a normal part of the college process. This has become such a problem that the government recognizes the economic devastation this will create and so they have inserted incentive programs within the tax code to provide relief. A guide to these programs can be found here.

For those that have already amassed large amounts of debt and are buried in financial stress, I’m going to guide you through the two most approachable methods of paying down those debts.

There are two good methods for debt repayment. Below is a description of them both:

  • The Debt Snowball Method– In this strategy, you want to pay your smallest debts off first and get them out of the way. This method ignores interest rates, to just focus on getting some of your small debts paid off fast. Although the math doesn’t seem to make sense with this strategy, it does make psychological sense. Getting excited about throwing money at large debts is hard, especially when it feels like you aren’t getting anywhere. Sometimes you just need some quick wins in order to stay positive and get motivated on paying off the rest.

  • If you find yourself having a hard time getting motivated or feeling lost in your debt, the Debt Snowball Method is probably a good fit for you.

  • The Debt Avalanche Method– This strategy works a little more the way one might assume. You would make the minimum payments on all debt, however any extra money goes toward paying off the highest interest debt first. Once the highest interest debt is fully paid off, then the extra cash goes towards the next highest interest debt. In the long-run this is the method saves the most money, but it can also feel like a longer road.

This method is the most financially sound method. If you are a person who likes to take on the most difficult or time consuming task in your day first, then this strategy will fit well with your persona.

The bottom-line is to know yourself. Either strategy is better than no strategy. The idea is to be chipping away at your debts in a calculated and methodical forward motion. Consistency matters, even if it doesn’t feel like you are making much progress. The goal is to pay off your debts fast, but if you are easily stressed and at risk of veering off course, then the Debt Snowball Method is the debt strategy for you.

If you need more specifics unique to your debt situation, we’re happy to help! Let us know how we can help further and connect with us to find more strategies and tips to help you!

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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