3 common debt payoff strategies

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In the U.S., debt is a reality for many Americans. According to the Federal Reserve’s most recent report, our total national household debt is $13.95 trillion. That’s a lot of student loans, car loans, mortgages and credit card debt. And for those who’ve fallen behind, it can mean a lot of headaches and heartache.

 

If you’ve had enough of all that stress and you’re trying to build a budget that tackles your debt, it helps to have a strategy you can stick to while you also keep current with your other monthly bills.

 

If you find yourself struggling to make ends meet and are unable to form a plan to get back on track on your own, many people find some assistance by exploring other options, such as a nonprofit credit counseling agency to put together a debt management plan, but there can be some downsides to that decision.

 

The basic concept seems simple enough: Typically, a debt settlement agency negotiates a repayment schedule with creditors for debt that can include credit cards, medical bills and personal loans; the consumer makes one payment each month to an account set up with the agency, which includes a small fee; then the agency pays each creditor over an agreed-upon period, typically two to five years.

 

You should be sure you can set aside that money for the full term of the plan. If you fail to make your required deposits to the debt relief savings account on time—if an unexpected home repair or medical bill breaks your budget, for example—you can be dropped from the plan and all its perks.

 

It’s also likely you’ll have to give up your credit cards for the length of the program, and you won’t be able to take out any new lines of credit during that time. It’s important to note that taking actions like closing accounts may impact your credit history, so it’s a good idea to talk through the pros and cons of this method of debt repayment with a trusted, credentialed advisor.

 

If that lack of flexibility doesn’t work for you, there are a few other strategies you could consider instead. They, too, take discipline, but you’ll be completely in control of the plan’s structure. The most well-known of the debt management plans are likely the snowball and avalanche methods, but there’s also the fireball method, which combines both strategies. Which method is right for you is something only you can decide, and we aren’t advocating one or all of these methods.

 

Here are some of the pros and cons of each.

 

Related: Beginner’s guide to good and bad debt

 

The Debt Snowball Method

Once you’ve compiled your monthly budget and have a good idea of how much money you’ll have left each month after paying all your bills, the snowball method directs any excess funds to the debt with the smallest outstanding balance.

 

Here are the basic steps:

  • Disregard interest rates and start by listing your debts based on how much you owe, from the smallest balance to the largest.
  • Make the minimum payment on all other debts and pay as much as you can each month to eliminate the smallest one.
  • After you pay off the smallest debt, you’d turn your attention to the next-lowest balance.
  • Keep going until you are debt-free. (And, of course, avoid the temptation to use the credit cards you’ve paid off.)

Pros: This approach is all about motivation. Instead of slogging away, trying to knock down your biggest debt, you’re picking off the little guys as quickly as possible. Depending on your personality, snowballing could provide the psychological boost you need to keep going.

 

Cons: It’s more about behavior modification than math. By focusing on the smallest account balance instead of the highest interest rate, you could be missing out on an opportunity to make a more significant dent in your debt. The sooner you get your debts paid, the sooner you can adjust your focus to saving and investing to reach other financial goals.

The Avalanche Method

The avalanche method puts any excess money in your budget toward the debt with the highest interest rate. Here’s how it works:

  • Disregard minimum payment amounts and balances, and instead list debts in order by interest rate.
  • Make the minimum payment on all debts and pay as much as you can each month to get rid of the bill with the highest interest rate. (For example, if you have three credit cards with interest rates of 21%, 18%, and 22%, and a student loan with 6% interest, you’d pay as much extra as you could toward the card with the 22% rate first and keep at it until the balance is zero.)
  • When the first balance is paid off, you’d move on to the debt with the next-highest interest rate. (The 21% card, in this example, then the 18% card, then the lower-interest student loan.)

Pros: Since this method focuses on the most expensive debt first, it helps bring down the amount of interest paid while working toward debt repayment. If you need a reminder of the impact of interest, check your credit card bill. The minimum payment warning explains just how long it will take you to get rid of that debt if you pay only what you have to every month.

 

Cons: This method could take more commitment and discipline. If you’re the type who needs to experience little “wins” along the way, you might lose interest before you wrap up this plan.

The Debt Fireball Method

This strategy takes a hybrid approach to the traditional snowball and avalanche methods. We call it the fireball method because it can help you blaze through costly bad debt faster so you can accomplish the things that matter to you. The steps include:

  • Categorize all debt as either “good” or “bad.”(Debts with a less than 7% interest rate are “good.” Debts with a higher than 7% interest rate that do not have the potential to increase your net worth are considered “bad” debt under this method.)
  •  List “bad” debts from smallest to largest based on their outstanding balances
  • Make the minimum monthly payment on all outstanding debts, then funnel any excess funds to the smallest of your “bad” debts.
  • When that balance is paid in full, you’d go on to the next smallest on the bad-debt list. Torch those balances until all your bad debt is repaid.
  • When that’s done, you’d keep paying off your “good” debt on the normal schedule while investing in your future. Then you could start applying the money you used to pay toward your “bad” debt to a financial goal, such as saving for a house, starting a business, saving for retirement, etc.

Pros: The math here may make more sense because you’re taking on more expensive debt before less-expensive debt. And it can also work from a psychological perspective because the payoff tends to accelerate as you approach the finish line.

 

Cons: If you’re more interested in dumping all your debt first before investing in the future, this approach might not satisfy your need to make even low-interest debt a payoff priority. Also, it typically isn’t as mathematically efficient as the avalanche method—though it could be more cost-effective than the snowball method.

 

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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website.
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7 strategies to double your money

 

A savings account can offer a secure place to keep funds you don’t plan to spend right away. But if you want to double your money and earn better returns than what a savings account might offer, investing it may help you reach that goal.

 

Figuring out how to double your money with investments often hinges on striking the right balance between risk and reward. Your personal risk tolerance and goals can influence how you invest and the returns your portfolio generates.

 

However, doubling your money is a reasonable goal, especially if you’re willing to wait for your money to grow. If you’re interested in doubling your money and growing wealth for the long term, there are several investing strategies to consider.

 

Related: 9 ways to save money on your utility bills

 

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The rule of 72 can be a helpful guideline for answering this question: How long does it take to double your money?

 

If you’re not familiar with this investing rule, it’s not complicated. It uses a simple formula to estimate how long doubling your money might take based on your annual rate of return. You divide 72 by your annual return to get the number of years you’ll need to wait for your investment to double.

 

So, for example, if you have an investment that generates a 5% annual return, it would take around 14.5 years to double it. On the other hand, an investment that’s generating a 12% annual return would double in about six years.

 

The rule of 72 doesn’t predict how an investment will perform. But it can give you an idea of how quickly (or slowly) you can double your money based on the returns you’re getting each year. Just keep in mind that the rule’s accuracy tends to decrease as the rate of return increases, so it’s more of a guideline than a hard-and-fast rule.

 

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One way to double your money through investing may be through your workplace retirement plan. If your employer offers a matching contribution to the money you’re deferring from your paychecks, that’s essentially free money for you.

 

Employer matching contributions are low-hanging fruit, in that you don’t need to change your investment strategy to take advantage of them. All that’s required is contributing enough of your salary to your employer’s retirement plan to qualify for the match.

 

The matching formula that companies use varies, but some companies offer a dollar-for-dollar match, meaning that the money you put into a 401(k) would automatically double when you receive your match. Keep in mind that some companies use a vesting schedule, meaning that you have to work at the company for a certain period of time before you get to keep all the employer contributions.

 

Aside from potentially helping to double your money, investing your 401(k) or a similar qualified retirement plan can also yield tax benefits. Contributions made with pre-tax dollars are deducted from your taxable income, which could lower your annual tax bill.

 

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Diversification means spreading your money across different investments to create a portfolio that will meet your needs for both risk and return.

 

As a general rule of thumb, riskier investments like stocks have the potential to generate higher returns. More conservative investments, such as bonds, tend to generate lower returns but there’s less risk that you’ll lose money on the investment.

 

If you want to double your money, then it’s important to pay attention to diversification and what that means for your return on investment. For instance, if you’re investing heavily in stocks then you could see greater returns but you might experience deeper losses if the market takes a hit. Playing it too safe, on the other hand, could cause your portfolio to underperform.

 

Also, keep in mind that there are many types of investments besides stocks, mutual funds and bonds. Real estate, cryptocurrency, stock options, futures, precious metals and hedge funds are just some stock and bond alternatives you could use to build a portfolio. Understanding their risk/reward profiles can help you decide what to invest in if you’re focused on doubling your money.

 

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The stock market is cyclical and you’re guaranteed to experience ups and downs during your investing career. How you approach the down periods can impact your ability to double your money when the market goes up again.

 

When the market drops, some investors start selling off stocks or other investments to avoid losses. But if you’re comfortable taking risks, the sell-off could present an opportunity to buy the dip.

 

If you can purchase stocks at a discount during periods of volatility when other investors are selling, you could double your money when those same stocks increase in value again. But again, making this strategy work for you comes down to knowing how much risk is acceptable to you.

 

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There are different investment philosophies you can adopt. For example, traders regularly buy and sell investments to try and get quick wins from the market. A buy and hold strategy takes a different approach, but it could pay off if you’re trying to double your money.

 

Buy-and-hold investing involves buying an investment and holding onto it for the long-term. The idea is that during that holding period, the investment will grow in value so you can sell it at a sizable profit later.

 

This is a passive investment strategy that relies on patience and time to increase your portfolio’s value. The longer you have to invest, the more you can capitalize on the power of compounding gains, or gains you earn on your gains.

 

If you’re using a buy-and-hold strategy with a value investing strategy, you could potentially double your money or more if your investments meet your expectations. Value investing means investing in companies that you believe the market has undervalued.

 

This strategy takes a little work since you have to learn how to understand the difference between a stock’s market value and its intrinsic value. But if you can find one of these bargain hidden gems and hold onto it, you could reap major return rewards later when you’re ready to sell.

 

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Another simple strategy to double your money is to invest more. Assuming your portfolio is performing the way you want and need it to to reach your goals, doubling your investment contributions could be a relatively easy way to boost your returns.

 

If you can’t afford to put big chunks of money into the market all at once, there are ways to increase your investments gradually.

 

If you’re investing your 401(k) at work, you could ask your plan administrator about raising your contribution rate annually. For example, you might be able to automatically bump up salary deferrals by one or two percent each year. And if that coincides with a pay raise you may not even miss the extra money you’re contributing.

 

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Minimizing tax liability is another opportunity to stretch your investment dollars. There are different ways to do that inside your portfolio.

 

Investing in your retirement plan at work is an obvious one, so if you aren’t doing that yet you may want to consider getting started. Remember, the longer you have to invest, the more time your money has to grow.

 

If you don’t have a 401(k) or a similar plan at work, you could open a traditional or Roth Individual Retirement Account (IRA) instead. A traditional IRA allows for tax-deductible contributions, meaning you get an upfront tax break. Then, you pay ordinary income tax on that money when you withdraw it in retirement.

 

Roth IRAs aren’t tax-deductible, since you fund them with after-tax dollars. The upside of that, however, is that qualified withdrawals in retirement are 100% tax-free.

 

A taxable brokerage account is another way to invest, without being subject to annual contribution limits the way you would with a 401(k) or IRA. The difference is that you’ll pay capital gains tax on your investment growth.

 

Paying attention to asset location can help with maximizing tax efficiency across different investment accounts. For example, exchange-traded funds can sometimes be more tax-efficient than other types of mutual funds because they have lower turnover. That means the assets in the fund aren’t bought or sold as frequently, so there are fewer taxable events.

 

Keeping ETFs in a taxable account while putting less tax-efficient investments into a tax-advantaged account, such as a 401(k) or IRA, could help with doubling your money if it means reducing the taxes you pay on investment gains.

 

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Learning how to double your money can mean taking a slow route or a quicker one, but it all comes down to how much risk you’re comfortable with and how much time you have to invest. One of the keys to growing your investments is being consistent and that’s where automated investing can help.

 

Learn more:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

 

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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

 

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