Financial Wellness 101: Conquering Your Debt

By: Keith Wagstaff · April 30, 2024 · Reading Time: 3 minutes

Debt in the US

If you have debt, you’re not alone.

“We see a lot of people struggling with debt right now,” said Kendall Meade, a Certified Financial Planner at SoFi, during Women’s History Month as part of SoFi’s Women’s Financial Empowerment webinar series.

American households shouldered $17.5 trillion debt at the end of last year, including $1.13 trillion in credit card debt, according to the Federal Reserve Bank of New York . While everyone’s situation is different, Meade shared advice that may help consumers cut down on their debt.

Good vs Bad Debt

“What’s important for people to understand is that not all debt is bad debt,” Meade said. “Bad debt is anything with an interest rate greater than 7%. That’s something we want to try to pay off aggressively, as quickly as possible.”

Anything less than 7%, she said, can be paid off over a longer period of time. For example, if you have a mortgage at a good rate, such as 3%, instead of trying to pay it off right away, “you can take that money and do other things with it, such as invest it where you might be able to get more of a return.”

Another way to think of good versus bad debt: Good debt strengthens your financial position over time, like student loans for a degree that will boost your earning potential, or a mortgage on a home that may appreciate in value. Bad debt, on the other hand, won’t benefit you in the long-term, for example, a loan for an expensive car that will depreciate in value.

Create a Strategy

If you have multiple debts, you want to make your minimum payments so you don’t hurt your credit score, Meade said. If you have cash left over after that, you should develop a strategy for which debts to pay off first, she suggested. Here are three popular options:

The snowball method: Address your smallest balances first, regardless of interest rates. This could be a good option for people who like the psychological wins of paying off entire balances.

The avalanche method: Focus on debts with the highest interest rates. It might take longer to pay off any one balance, but it will save you money in the long run.

The fireball method: Categorize your debts as good and bad. Then, focus on paying down the smallest balances on your “bad” list. This combines the positives of the snowball and avalanche methods.

No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts, Meade suggested.

For more helpful tips, check out the webinar here.

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