February 14, 2025
Five ways you can assess, manage and pay off debt

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According to Northwestern Mutual’s 2023 Planning and Progress Study, the average American has $21,800 in personal debt, excluding mortgages. However, taking a deeper look at the data, it is clear that people in America are traveling in different directions on the debt highway.

More than four in 10 (43%) say they are currently at or near their lowest level of debt – an impressive feat in today’s high-inflationary economic climate. However, more than a third (35%) say their debt is at an all-time high – credit card debt is more than double that of any other source of non-mortgage personal debt. People who have personal loans say that 30% of their monthly income goes towards paying it off, and most expect to be in debt for years.

US consumer debt is nearly $5 trillion, according to the Federal Reserve, and it’s top of most Americans’ minds. More than six in 10 people say they are prioritizing paying off their debt rather than putting savings first.

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It’s encouraging to see personal debt levels coming down a bit: average personal debt has decreased by a total of $8,000 since 2019. But the best news is this: Anyone can reduce their debt if they make a conscious decision to act. Here are five ways to look at debt and how it can affect your finances.

Define your ‘good debt’ and ‘bad debt’

Many people believe that all debt is bad debt, but the truth is that some debt can be good and even beneficial to help people achieve their long-term goals. Good loans have lower interest rates and help borrowers reach important financial goals like paying off student loans or mortgages.

take an interest in interest rates

Many people who want to pay off their debt aren’t sure where to start. The first and best place to look is interest rates. It is wise for people to audit all their debts before taking action – and to consider them solely as part of an integrated and comprehensive plan.

Another positive step is to consider refinancing the loan at a lower rate. If you have good credit, you may qualify for a personal loan, consolidation loan or refinance of your student loans. You might also consider transferring your credit card debt to a new card with a 0% introductory rate and no balance transfer fee. This can help you save money on interest while paying off your loan.

set your strategy

Once the audit is complete, the next step for someone is to choose a loan repayment strategy that is right for them and their unique plans. Two popular strategies that many people use are:

  • Debt Snowball. In this strategy, people start paying off the loan with the smallest balance first, while also making the minimum payments on all other loans. Each time people pay off a loan, they move on to the next loan with the smallest balance, and so on. For someone who feels emotionally overwhelmed by the various types of debt they have, this approach can feel compelling and empowering.
  • debt avalanche. In this approach, people start paying off the loan with the highest interest rate first, while also making the lowest payments on all their other loans. Once they pay off the balance with the highest interest rate, they move on to the balance with the next highest interest rate, and so on. This strategy is ideal for someone who wants to emotionally follow the math and improve their net worth as efficiently as possible.

Keep an eye out for wealth-building opportunities

Although paying off debt always seems like the right move, sometimes it’s actually better to save or invest. For example, if someone has a loan with a 3% interest rate, but can earn 5% in a savings account, they can grow their net worth faster by saving. It’s important to think seriously about your loans and the opportunities you have.

Manage debt as part of a comprehensive plan

The road to a debt-free lifestyle and a secure financial future can be complicated. Many routes are bumpy and full of difficult choices. Clarity on which path to take is possible, especially for those who have the help of a financial advisor. Knowing what you can afford to spend now versus saving for later can help anyone reduce worry, build financial confidence, and get closer to financial security.

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This article was written by our associate advisor and represents the views of us, not those of the Kiplinger editorial staff. You can check consultant record with seconds or with FINRA,

Source: www.bing.com

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