GRAND RAPIDS, Mich. — Many of us are feeling a little extra strapped for cash after the holiday season. This month, we’re helping you get financially fit — starting with everyone’s favorite four-letter word: debt.
According to Forbes, the average American carries more than $6,500 in credit card debt.
That means if you don’t start paying it down and are carrying an average interest rate of 23%, the balance could grow to nearly $65,000 over 10 years.
So if one of your New Year’s resolutions is to tackle debt, where should you start?
“Write down every single debt that you or you and your partner have, because you’re not going to be able to tackle it if you don’t know what it is,” said Corey Davis with Mattson Financial Services.
According to Davis, there are two main strategies for paying down debt: the snowball method and the avalanche method.
Let’s start with the snowball method. That’s when you list your debts from highest to lowest interest rate, make the minimum payments on all of them, then put any extra money toward the debt with the highest interest rate first.
“With that strategy, you’re basically using math to pay the least amount of money overall from start to finish,” Davis said.
Then there’s the avalanche method, which focuses on paying off debts starting with the one with the lowest balance first.
“So for people who are more math-driven and want to save the most money, the avalanche method makes sense,” Davis said. “But for people who want the motivation of seeing accounts closed, the snowball method can work better.”
As a reminder, however, if you are only paying minimum payments, Corey says it could take up to 20-25 years to pay off debt.
The next big question: Should you focus on paying down debt or building savings first?
Davis says the answer is both — unless you don’t have an emergency fund of three to six months’ worth of living expenses.
“If you don’t have that, and you’re putting all of your extra income toward debt, then a medical expense or car repair could force you right back into debt,” Davis said. “That can completely derail the plan you were trying to follow.”
If you are a numbers person, Corey suggests debt should be no higher than 40 percent of your current income.
"Over like 43% is what I've heard, tends to be kind of getting in that danger level where maybe you have a little bit too much debt."
