4 Smart Debt Strategies To Help Set You On The Path Toward Wealth

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By Anna Davies

Consumer debt is at an all-time high. According to Experian, U.S. consumer debt grew by 6%, from $800 billion to $14.88 trillion in 2020—the highest annual growth recorded in over a decade.

The right amount and type of debt can help you achieve a number of financial goals, from building your credit score to buying a house to saving for education, but in order to optimize your financial future, it’s critical to keep your debt in check.

Consumers understand this: The Consumer Sentiment Study from Marcus by Goldman Sachs found that more than a quarter of Americans (28%) say their biggest financial priority over the next six months will be paying off debt. 

To help set you on the path to achieving your financial goals, here are four debt strategies to consider.  

1. Contribute To Your Emergency Fund And Retirement Accounts

Paying down debt is important, but before you even get started, you need to make sure you have a financial cushion to fall back on in the event you lose your job or face an unexpected expense, like a sudden home repair or surprise medical bill. This emergency fund is similar to a savings account you can easily dip into if things go awry. 

“Without having an emergency fund in place, an unexpected expense could put you right back into debt, wiping out any of your efforts to pay it down,” says Elizabeth Kozack, managing director and co-head of Marcus Lending. “Individual situations of course vary, but it’s generally recommended to set aside three to six months of living expenses somewhere safe, like in a high-yield savings account.”

As you establish an emergency fund, you may also want to consider retirement savings, especially as your emergency fund grows. “You can always start small and then gradually increase your contributions over time,” adds Kozack. “Small amounts can go a long way, especially if your employer offers a match program.”

Once these elements of your financial plan are in place, you can then prioritize paying down your debt.

2. Pay Down Higher-Interest Debts First

Not all debt is created equal. Certain debt, such as a student loan or a mortgage, is traditionally known as “good” debt because it’s paying for something that isn’t likely to lose its value over time. Of course, this is a generalized categorization, but in general, “good” debt also tends to have lower interest rates than other debts and may be a loan that you’re paying back in installments—meaning that your monthly bill does not fluctuate over time. 

Meanwhile, other debt may be revolving—the amount you owe is based on the amount of credit you’ve used—and have a variable interest rate, which means the amount of interest you pay can change.  

High-interest rates, like those often associated with credit cards, can make it tough to not only make a dent in the principal (e.g., the original amount of funds you borrowed) but also impact your ability to save. “The more you have to put toward making interest payments each month, the less you’re able to put toward your savings,” says Kozack, so in general, it’s a good idea to tackle the higher-interest debts first.

3. Consider Debt Management Tools

Debt consolidation—or combining multiple debts into a single, larger debt—through a personal loan can be another avenue to pay down debt.

This approach, which is especially effective for those burdened by high-interest credit card debt, can help reduce debt in two ways: Your personal loan may have a lower interest rate than your credit cards, which means more of your money can go toward paying down the principal rather than the interest. Second, because debt consolidation loans often have shorter, fixed terms than revolving credit card debt, you may be able to pay off your debts faster and know exactly when your last payment will be.

“When considering whether a debt consolidation loan makes sense for your situation, we recommend doing research and taking into account the benefits that can come along with it,” explains Kozack. 

It’s worth noting that personal loans vary based on lender, and terms take your credit score into account—the higher your credit score, the less interest you may pay. So be sure to compare loan terms, including origination fees. Some personal loans may also charge additional fees, like if you pay off the loan early. Marcus by Goldman Sachs offers personal loans that do not have fees.

4. Make A Plan For How To Stay Out Of Debt In The Future 

Paying off debt is only one part of a debt management strategy. A second part is focusing on how to stay out of debt. This includes coming up with a budget management plan and setting savings goals to stay on track. 

“Once debt has been repaid, it is important to make a realistic budget based on earning power and basic needs. Cutting down on unnecessary spending is also key to avoiding getting caught up in consumer debt again,” says Kozack. “Another step is to start making your money work smarter for you. Consider savings accounts that offer high annual percentage yields. The higher the interest rate, the more money you can earn.”

Bottom line: Though debt may seem overwhelming at times, tackling it can be manageable. With a little organization, strategy and planning, you can pay down debt and get on track towards a bright financial future.

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