According to a recent LightStream Survey conducted by the Harris Poll, Generation X has the most debt when compared with Boomers and Millennials. Worse, 22% of Gen Xers feel that they’ll never be able to pay it off.
It’s a tough situation. And it doesn’t get easier when we’re raising children, caring for aging parents, and trying to save for something resembling retirement.
While it’s easy to feel overwhelmed, the way to begin any huge task is with a first small step. But it’s also smart to have a plan that shows you where that first step should land.
Reduce the mountain with an avalanche
When you have a mountain of debt, it’s psychologically tempting to tackle the largest amount first. Or maybe knock off a few smaller amounts for the satisfaction of seeing them gone.
But the popular “debt avalanche” repayment strategy says you pay off the highest-interest debt first, while making minimum payments on other loans. High-interest debt is increasing your debt the fastest, and that will slow your repayment progress.
Here’s an example from The Balance. Suppose you have:
- $23,000 in student loans at 4.29 percent
- $3,000 in credit card debt at 15.59 percent
- $12,000 car loan at 3.5 percent
With the debt avalanche approach, you’d make only the minimum payments on your student loans and car payment each month, and pay as much as you can on your credit card debt.
Find and funnel extra cash
In the example, you’re also quickly getting rid of your smallest balance first, which is great for motivation. But remember, the loan amount is irrelevant — your focus is solely on attacking high-interest debt in descending order.
Once you’ve identified and ranked all your various loan amounts and interest rates, then you can start cutting back on spending and pay as much as possible on the target debt. Whether it’s $10, $100, or $1000 a month, find ways to funnel your cash in that direction.
The key is to pay as much as you can over the minimum on the highest interest rate loan you have at the time. It still may take a while, but the avalanche method will get you there faster than otherwise.
A “Debt Avalanche” Could Get You out of Debt (The Balance)
