For some, debt has become a necessary part of life. They know they can’t have too much debt but also understand that it’s integral to their financial life. But for others, perhaps for many, debt is a burden they wish to shed as soon as possible.
So, which side do you fall on? Is debt something you simply wish to minimize or eliminate entirely? This question is a common dilemma for borrowers. But as in most personal finance-related decisions, what works for Borrower 1 may not work for Borrower 2, 3, and so on. Your specific situation, risk tolerance, and overall goals generally determine the most effective approach to your debts.
Examining your debt
First things first: what are the different types of debt you have? Suppose you have high-interest debts, such as monthly credit card dues. These debts are like leaky faucets in your bank account, constantly dripping away your hard-earned cash. However, if you have low-interest debts such as mortgages or student loans, then you have generally more manageable financial circumstances. This type of debt can even be strategically advantageous in certain situations.
It’s important to take the time to understand your debt because it can help you create a comprehensive financial plan and make informed decisions about how to tackle your debt. You may also find that a combination of both approaches—minimizing high-interest debt while working to eliminate other debts—is the most effective strategy for your situation.
The case for minimization
The idea behind minimizing debt is to make strategic payments that reduce your overall interest burden without completely draining your financial resources. This approach allows you to free up cash flow for other financial goals, like saving for retirement or building an emergency fund. Imagine trying to run a marathon while carrying a heavy backpack—you could probably do it, but wouldn’t it be easier and faster without the extra weight? That’s what minimizing high-interest debt does for your finances.
Minimization might make more sense if you have a low-interest mortgage, especially in a period of high inflation. Instead of throwing every extra dollar at the mortgage, you could consider investing a portion of your money in assets with potentially higher returns, essentially aiming to outpace the interest you’re paying.
The appeal of elimination
There’s a certain allure to the idea of becoming completely debt-free. It’s like wiping the slate clean and starting fresh. The “debt snowball” and “debt avalanche” methods are popular strategies for those seeking to eliminate debt systematically. These methods provide a psychological boost as you witness your debt shrinking, which can be incredibly motivating.
If you can take higher risk, then eliminating debt can make sense. This is especially true if not having to worry about debt every night matters to you (as in to us all).
Finding the right path for you
Ultimately, the question you need to answer is this: What are your priorities? This will determine the best path forward for you. Those unsure of their options find it advantageous having a financial advisor or the best money lender by their side during these critical moments in their debt journey. Do not hesitate to seek one when necessary.