Pay Down High Interest Debt
By Stephanie McElheny
At Aspen Wealth Strategies, we first ensure our clients are set up with an emergency fund and a budget that works for their lifestyle. Then, we move to the next game-changer: help them tackle high-interest debt.
The usual culprit here? Credit cards.
It often helps me to talk about credit card purchases this way: If you’re carrying a balance and paying interest, you’re actually paying a premium on EVERY ITEM YOU BUY. Think about it. When you factor in those interest fees, it’s like buying Target underwear at Nordstrom lingerie prices. What’s the satisfaction in that??
As a financial planner, my two cents is that if you don’t have the cash, you shouldn’t buy it.
Credit cards should be used for getting reward points or airline mileage and maintaining credit—not providing a loan until you get the money to pay it back.
So getting a handle on these balances is key.
A popular strategy is the “snowball” method, which involves looking at your debts, starting with the smallest one, paying it off, then the next, until you get to the larger balances.
The snowball method, where you start with your smallest debt, pay it off, and move down the line to your largest debt, works because it gets people started, helps them feel successful, and motivates them to keep going.
However, I don’t love the idea of starting with the smallest to largest debt, regardless of interest, because I personally feel like you want to tackle the higher interest balance first. High interest is hard to get ahead if you don’t start immediately.
I like advise people to start with tackling the higher interest debt, and just pay the minimums on the lowest debt like student loans as you whittle away at the more expensive debt.
To pay down large sums, a home equity loan could be an option, if you have a decent amount of equity built up. For example, if you have $100,000 in equity and $20,000 in credit card debt at 20% interest, you’d want to knock out that debt and pay it off with a home equity loan at 4% instead.
But you could be playing with fire, because in this case, your house is collateral. If you’ve had trouble managing debt and you don’t pay THIS one, then your house is on the chopping block.
Debt consolidation companies should be a last resort. Depending on the company, some are predatory. Vet these companies carefully because the potential fee you pay may not be worth it. Some fees are hourly, some flat, some a percentage; do the homework before committing.
It’s better to spend $250 for an hour with a financial planner than go to consolidation folks to call creditors and strike a deal.
Want help crafting a personalized plan to pay down debt? Aspen Wealth Strategies can help. Call us (303) 421-1113 for a free consultation.