Managing Debt 101

By Hightower Westchester on September 5, 2023

Debt…just the word itself gives people anxiety! Yet, here we are with most individuals having some form of debt, be it a mortgage, an auto loan, a student loan – the list goes on and on. According to Bankrate, the average American has over $96,000 worth of liabilities.¹ Learning to live with debt can be difficult for individuals, but as we know, it is a part of life.

So, what is debt, and how do you manage it? Debt is essentially when you, the debtor, owe another party, a creditor.  Generally, there is a payback period and, most likely, an interest rate tied to the debt. Managing debt is different for everyone. Some individuals don’t want any and try to pay it off ASAP. While others can live with high amounts of leverage and even attempt to work the system to their advantage. Either way, it is essential for most people so they can afford a home, a car, and/or get a degree.

The term debt tends to have a negative connotation, so I want to focus this piece on how you can rid yourself of debt should you come into a large amount of it.

First off, think of it as a marathon, not a sprint. It is easy and fast to take on debt, but it usually takes time to pay it back. Start putting together a plan. Assess your debt load by looking at balances, the type of debt (credit card, personal loan, mortgage, etc.), payback timeframe or minimum payment, and interest rates. From there, you have a few strategies:

• Debt snowball:  Focus on paying off the smallest balance first. You make the minimum payments on all other debts, and whatever is left over goes towards the smallest balance.
  • This is not always optimal because you’re not necessarily paying off the loan with the highest interest rate, but from a psychological standpoint, paying off a loan is a win and keeps you motivated to pay off the rest.
  • Once you’re done paying off the smallest balance, you start on the next smallest balance.
• Debt Avalanche:  Focus on the debt with the highest interest rate first. You pay the minimum payment on the other debts, and whatever is left goes towards the debt with the highest interest rate.
  • This approach saves on interest but can take a while, depending on the size of the debt.
  • If you’re someone who likes more instant gratification, then this may not be the right approach for you, as it takes longer to eliminate multiple debts.
• Debt Consolidation:  You can combine multiple debts into one monthly payment, which makes things easier. Two strategies are:
  • Transfer all your debt to a balance-transfer credit card. Ideally, you should look for one with a lower interest rate.
  • Get a personal loan and use the money from the loan to pay off your debts. Then you pay back the loan according to the terms of the loan.

A few other strategies include lowering your bills. How many streaming subscriptions do you have right now?! Another is to make more money. You might laugh at that one, but taking on a part-time job can help bring in extra income to pay off your debt faster.

Debt affects your credit score. The key ratio here is your credit utilization ratio, or how much credit you are using relative to what you are extended. A higher utilization ratio will negatively impact your credit score. There is no maximum or minimum level but the lower the better.

As we have mentioned in many blogs before, budget! Create a system that works for you, leverage technology, and most importantly, stick to it!

If all else fails, you can make settlements or agreements as well as file for bankruptcy. These approaches are not ideal, but they are available to you depending on your situation.

Lastly, a few years ago, I put together another blog addressing a common question many young investors run into, do I pay off my student loans or invest? Here is the link to that blog in case you are interested. https://hightowerwestchester.com/blogs/insights/education-debt-is-it-a-barrier-to-investing.

If you have any questions on this topic, please feel free to reach out.

Richard Flahive – Chief Investment Officer – Hightower Westchester

914.825.8639 – rflahive@hightoweradvisors.com

Sources –

¹https://www.bankrate.com/personal-finance/debt/how-to-pay-off-debt/