Key takeaways

  • Debt can be a tool that helps you achieve your financial goals, but too much debt can cause stress and affect your financial security.

  • A debt management plan helps you pay down debt while balancing your other objectives, such as saving and investing.

  • Two debt management strategies are the avalanche method, where you pay off the highest-interest debt first, and the snowball method, where you tackle the smallest debts first.

When used strategically, debt can be a tool that helps you achieve your goals, whether that’s education or home ownership. However, uncontrolled debt that accumulates too quickly can become a major source of financial stress.

Amid higher mortgage rates, inflation and student loan repayments resuming, it’s easy to see why many Americans are feeling overwhelmed at the thought of tackling their debt, let alone managing it alongside other objectives, like saving and investing.

The good news is that by examining the type of debt you have – and how it has accumulated – you can create a plan that helps you feel more financially secure. Let’s explore how to manage your debt in a way you can feel good about, even while juggling other financial goals.


Understanding different types of debt

Though debt is a four-letter word that makes many people uncomfortable, it’s important to reiterate that not all sources of debt are inherently bad. Peter Medin, Wealth Management Advisor with U.S. Bancorp Investments, explains that certain types of debt are helpful in achieving long-term goals, while others may stem from unwise financial decisions.

“Good debt might be considered anything that can provide value over the long term,” Medin says. “If you’re doing work on your house or paying off student loans, that’s not the same as racking up high-interest credit card debt on impulse purchases.”


Addressing the root causes of debt

If you have uncontrolled debt from living outside your means, it’s important to examine the root causes of this overspending before you do anything else.

“It’s one thing to say you have bad debt and are spending too much on credit cards, for example,” says Medin. “But if you don’t change the spending habits that created the debt, then that’s a problem.”

Medin recommends looking at your bank or credit card statements from the past few months to see all the purchases you’ve made, even the smaller ones. That way, you can see how they add up over time. Tracking your spending and examining your financial habits so you can live more within your means is a crucial step in preventing debt from getting out of control again.


Creating a debt management plan that works for you

Once you’ve identified the sources of any undesirable debt, you can look at approaches to managing your existing debt. There are several different strategies, but let’s look at two of the most popular.

  • Avalanche method. This strategy focuses on tackling the debt with the highest interest rate first. While it could take longer to pay off, it might also save you the most money in the long run.
  • Snowball method. This approach prioritizes paying off your smallest debts first, regardless of interest rates. Seeing those smaller debts vanish can provide an incentive to keep going.

Importantly, the best method is the one that will be most motivating for you. “You have to find the approach that you’re comfortable with, so you stick with it,” Medin says.

“It’s one thing to say you have bad debt and are spending too much on credit cards, for example. But if you don’t change the spending habits that created the debt, then that’s a problem.”

Peter Medin, Wealth Management Advisor, U.S. Bancorp Investments

Another option is debt consolidation. This involves combining multiple debts into a single loan in the hopes of obtaining a lower interest rate and making one simple monthly payment. There are pros and cons to debt consolidation; while it may simplify your repayment process and could potentially save you money, it’s not a magic bullet.


Prioritizing debt management with saving and investing

Even if you’re working through a debt management plan, continuing to save and invest – if your budget allows it – will help you work toward other financial goals more quickly. For example, you could shrink your savings and investment contributions while you’re still paying off your debt. Then, once your debt is managed, you can allocate more funds to these activities.

If you aren’t able to pay off debt, save and invest at the same time, Medin suggests prioritizing your financial goals in a way that brings you peace of mind.

“You can certainly consider what’s going to be most efficient, which will look a little different for everyone,” he says. “But there are emotional aspects to consider, too. If you have debt that’s just nagging at you, and you want to completely pay that off first, I think it’s okay to focus on eliminating the debt that causes you the most anxiety—because emotionally, it can take a toll.”

Medin also notes it’s wise to build up a cash buffer for the unexpected expenses in life, so try to make regular contributions to an emergency fund, even if they’re smaller than you’d like.

“Whether you create an emergency fund or set aside money in an account like an HSA for unexpected medical bills, building up that buffer is a smart thing to do no matter what,” says Medin. That way, when unexpected expenses do crop up, you won’t go deeper into debt by trying to pay for them.


Seek financial advice to help with debt

Getting a handle on your debt can feel overwhelming. But by identifying the root causes of your debt and determining what method of debt repayment is most sustainable, you can create a debt management plan that works for you – even while you work toward other financial goals.

A financial professional can help you work toward these tasks while providing impartial and experienced guidance that takes your entire financial life into consideration. “It’s a balancing act,” notes Medin, “between living within your means and still enjoying a nice quality of life. And we’re here to help you with that.”

Learn how we can help you identify and prioritize your goals and create a financial plan that can put you on track to reach them.

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