Five Questions: Debt Month
Summary: Holiday spending hangovers make January a debt month for some of us so we are bringing you five questions on how to deal with debt.<br> Question One<br> Hey Andrew,<br> I just started listening to the podcast recently and I’m enjoying the wide range of topics. You guys may have covered this and I haven’t gotten to that episode yet.<br> If not, my biggest issue is prioritizing my debt payment. I think it’s more of my mindset that I need to adjust rather than a strategy. I know what I need to pay down first, I am just hesitant to spend my extra money towards that debt. It feels better and more secure to hold.<br> You do need a plan to repay debt. Just throwing money at various debts randomly won’t pay it down as quickly as using a proven method of debt repayment and therefore will cost you more money in interest.<br> There are two popular methods of debt repayment strategies; snowballing and stacking. We devoted a whole episode to this topic, you can find <a href="https://www.listenmoneymatters.com/get-out-of-debt-snowballing-stacking/">here</a>. To sum up the two methods:<br> Snowballing means listing all of your debts in order of smallest to highest dollar amount and then using any extra money to pay off the smallest balance while only paying the minimums on the others. If you have a $5,000 student loan at 4% interest, a credit card balance of $6,000 with 17% interest, and a $10,000 car loan with 9% interest, you pay off the student loan first, followed by the credit card and finally the car.<br> Once the smallest debt is paid, you move to the next smallest using the same strategy and include the amount you were paying on the first debt into your monthly payment on the next. You continue to do this until all of the debts are paid, the largest being the last one to go.<br> To use the stacking method, you list your debts in order of highest to lowest interest rate, regardless of the dollar amount of the debt. You throw as much money as you can at the debt with the highest rate of interest. If you have the same debts we listed above, they would be ordered this way; the $6,000 credit card, the $10,000 car loan, and finally the $5,000 student loan.<br> Once each debt is paid, you move down to the next highest interest rate one, again, using the money you were paying towards the last debt, and do the same. So on and so on until all the debts are paid.<br> I understand how sometimes it’s hard to do the right thing even when we know it’s the right thing. Interest we’re paying on our debt doesn’t feel as real to us as looking at our checking account balance and seeing a healthy dollar amount so it can be hard to let that money go to something that feels kind of abstract.<br> So here are some real numbers that might convince you. If you paid off that $6,000 credit card bill at $100 a month, it would take 135 months, ELEVEN YEARS, to pay it off and you would pay, $7,486 in interest alone. That’s more than you initially charged to the card.<br> Now, if you buckled down and paid $500 a month, it would take you just fourteen months and you would “only” pay $623 in interest. If that doesn’t convince you, I don’t know what will!<br> Question Two<br> Hey Andrew,<br> I thought it might be interesting to get some advice/hear your thoughts on financial planning for young, high net income earners in up-or-out industries.<br> Personally, I’m a corporate associate at a large law firm – the kind where people stay for a few years and lateral out to smaller firms or go all in and try to make partner. The starting salary for first-years now is $180,000 with roughly a 5.5% salary increase per year of seniority. We also have sizeable market bonuses, though not as great as our friends in the banking/finance industry.<br> Additionally, our firm partners with a bank to refinance student loans at a measly interest rate of 1.95% (!),
