*Special thanks to our partner, Clint Brady from Northwestern Mutual, for sharing this information with us!
According to a 2019 Northwestern Mutual Planning and Progress study, 34 percent of Americans’ monthly income is going toward paying off debt with an average of $29,800 in personal debt. “20 percent report that debt makes them feel physically ill at least once a month.” Having that burden on your shoulders can be overwhelming for many, especially if you don’t have a plan in place.
Good Debt vs Bad Debt
One of the most important things to understand about debt is that some debts are good such as a mortgage, student loan, or business ownership because they will provide you with future economic value. These debts tend to have lower interest rates and tax advantages by giving you the ability to deduct the interest you pay. When building your financial plan, you may come to realize that it isn’t necessarily in your best interest to pay these debts off as soon as possible when you could instead be putting that extra money into investments with a higher potential rate of return. On the other hand, credit cards and car loans are the most common types of “bad debt” because of their high interest rates and no future economic value; These are the debts you want to pay off first and ahead of schedule.
Strategies: Debt Avalanche vs Debt Snowball
Debt Avalanche: List out your debts from highest to lowest interest rate. Continue making the minimum payment on each debt and put extra cash towards the debt at the top of the list with the highest interest rate. When the highest-interest rate debt is gone, cross it off your list and put the extra money plus the minimum payment you were making on that debt towards the second debt on the list. Keep up this avalanche of payments to eliminate your debt in a way that lets you pay the least amount of interest.
Debt Snowball: List out your debts from the smallest to largest amount. Similar to the avalanche, you will make your minimum payments, but this time put the extra cash towards the debt at the top of the list with the smallest balance. When a debt is paid off, you will shift the extra cash and minimum payment towards the next debt on the list until they are all paid off. The snowball is the best way to reduce the number of debts you have as fast as possible and the task of paying off each debt feels more satisfying.
The Importance of Financial Balance
Paying off debt is an important part of any financial plan in which debt lives. Like anything else in life, it’s important to have balance. Balance in spending for today, saving for tomorrow, and paying off debt to make sure you are getting the most out of your money. At times, we get so focused on one single element of our finances, that we neglect others. It may cause you to lose financial efficiency in the short and long term. Working with a financial professional may help you find the right amount of balance. They can help you put together a budget, identify your goals, and give you options to save for your future while you still live for today.
Schedule a meeting with Clint if you are interested in taking steps to a more confident and independent financial life. We make sure you have all the resources necessary to create your path to financial independence.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) and its subsidiaries. Clinton B. Brady is an Insurance Agent of NM and Northwestern Long Term Care Insurance Company and a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser and member FINRA and SIPC. Representative of Northwestern Mutual Wealth Management Company® a subsidiary of NM and federal savings bank.
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