Advice for Chipping Away at Debt
Transcript:
Katie Nealis:
I have a question in for Ethan asking I see outstanding debts, how do I pick which one to pay down first, and should I pay them all off?
Easan Arulanantham:
So there’s kind of two strategies that a lot of people talk about with debt. And the first one is the snowball method, which is the idea that you pay down your smallest debts, and you kind of roll, keep rolling and pay down the next smallest and the next one. And then there’s the avalanche method, which is you pay down your highest interest rate.
And I prefer avalanche, because the snowball, though you’re paying them more, you’re paying down smaller pieces, and you’re getting rid of them. So psychologically, it’s important, you’re, you’re leaving the high interest. So that will kind of eat away, those interest fees will eat away at you over time. And so credit cards are always the first thing you pay down, if you have excess money, you never want to carry a balance on a credit card. And then whatever the next one is, that’s the next highest you’d pay down and you progressively get rid of them as you go. But also, you maybe don’t want to pay down all your debt, say you have a mortgage at 3%. And you not going to retire for 20 years, I think you should put the money into the market where you’ll on average, so that nine to 10% in the market, versus the pain that 3% fee.
Tom Vaughan:
Yeah, that’s a that’s a great comments. He’s and actually, I think one of the strategies that I really like, is, you know, I believe very strongly it just, I’ve done 6000 financial plans and have hundreds of clients I’ve worked with, I’ve walked through all these lives. And one of the things that I’ve seen is that people are very successful retirements, they seem to have no debt and retirement, even if you can make an argument that they should, because of the fact that you know, the 3% versus nine to 10. And so maybe one strategy is, you know, again, if you’re in retirement should be maybe a little bit more aggressively paying it down, because you know, you want to make sure you have that flexibility. But if you’re not in retirement, pick an age in retirement where you’d want to pay it off, right, so let’s say 65. And I’m saying 55. And so I make the payments that are going to make my debt go away by the age of 55.
And so obviously, it start with those high interest rate things, I totally agree with that. But then when you get down to that low interest rate, like a mortgage payment, you know, paying it off at the expensive, you know, at 55, for example, or 45, or 25, whatever it is paying that off at the expense of investing money in the market doesn’t make sense to me. But it would be great to have that kind of balance between those where you’re paying it off by age 65. And so you figure out as you get out, I can figure it out for people to get my 12 sheet calculator out, I can figure out what payment it would would take to kind of pay off that debt. By the time they’re 65. That way, they accomplish what I’m seeing in my most successful retirements, which is a debt free retirement.
So that, you know, kind of bridges the gaps and the invest the rest, right? You know, I’ve been debt free retiring makes you so much more flexible, not having that fixed mortgage payment every year or every month. Yep, exactly. When when we have another 2008, and you’re living off of the stock and bond market, you know, at for part of your income source. And all of a sudden, it’s down, you know, a lot of depends on how much you have in bonds versus stocks as to how much you’re going to be down. But you’re still withdrawing that same money to pay that mortgage man, you can really put some damage into that portfolio. Whereas if you don’t have the mortgage, maybe you can cut back, you know, for a while, you know, it took five years for the market to come back in 2008. So be awful nice to be able to kind of cut back, let your accounts recover. And again, if you have a lot of fixed costs, and mortgage being one of those can be quite a high one. You know, it can really be more difficult if you’re tying your hands a little bit and flexibility versus when you’re working and I got a job. It’s a little bit different. You’re living off of this kind of fluctuating asset. That that’s the strategy. I would Yeah, I would love to see you know, everybody that ever retire and be debt free. doesn’t always work that way, but it’s a good goal