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Chapter 8: Debt

Chapter 8: Debt

Debt in America has become an epidemic, with the average person spending about $1.50 for every dollar that they bring home.

Debt is overwhelming, often feeling like a crushing weight sitting upon our shoulders. While it may come as a relief to know that you are not alone – the average American has close to $40,000 in debt – debt should never be brushed off as a simple fact of life. It isn’t something that you have to live with. With a little perseverance and self-control, there are options to get out of debt and lose that weight sitting on your shoulders once and for all.

Need some visual aids to keep you motivated? We’ve got you covered.

The Debt Avalanche Method

The debt avalanche method is the act of paying off your debt with the highest interest rates first. With this approach, you would throw all of your available money at your loan with the highest interest rate, while still making the minimum payments on your other debts.

The benefit to this method is that you will save more money on interest and actually pay off your loans faster.

The downside to this method is that it feels like it can take forever to gain momentum. This makes it difficult to sustain your motivation while paying off debt.

The Debt Snowball Method

Using the debt snowball method, you would pay off your debt with the lowest balance first. With this approach, all of your available money would be funneled toward your loan with the smallest balance. Meanwhile, you would still be making the minimum payments on your other debts.

This method offers a sense of accomplishment that the debt avalanche approach doesn’t, because you will pay off loans faster initially. The result is greater mental satisfaction.

That being said, by using this method, you will end up paying more in interest over time, and it could take you slightly longer to be debt-free.

Choose Not to Make Extra Payments

But what if you have a very low interest loan? You should consider investing your extra money instead.

For example, what if you have a $9,000 car loan with a 1.79% interest rate?

Instead of making extra payments on this loan, you should consider investing that extra money into retirement accounts. By leveraging a higher return on your retirement accounts, and allowing the power of compound interest to kick in sooner, you can out-earn the interest that you are paying on the car loan.

This method is not for everyone, and some people will have better peace of mind knowing that they are debt free. We chose to keep our low interest car loan, and invest all of our extra cash instead.

So how do you determine if you should invest or pay it off? The rule of thumb we used is if the interest rate is below 3%, we knew we could earn more with our investments. Remember your path to financial independence is a marathon, not a sprint!

Other Things to Consider

Utilize the method that makes the most sense for your personality and your situation. Ultimately the best method to paying off your debt is the method that you can stick to.