Paying Off Debt
Need some guidance on where to start paying off debt? Our Chief Financial Officer, Sean Rinkenberger sits down with Katie Nehl, Communications Manager at FCCU to answer some common questions about paying off debt.
You can also listen to the full version of this sit-down, via our podcast, ‘Let’s CU Succeed’.
Katie: Say you are 30 years old, you have a little bit of credit card debt, have a house with medium size house payment of $1200 per month, a car payment and lastly student loans. Speaking freely, what option do you pay off first?
Sean: Generally speaking the credit card debt is what you want to pay the closest attention to. It is really easy to make a minimum payment but the interest rates are always the highest and it is the one that can get away from you really easily. So I would start there. Moving forward, there are different ways to go about it. If you feel really good about your ability to manage your debt and can be disciplined as you pay it down, look at the interest rate and see which ones have the highest interest rates. Paying those with the highest interest rates first will save you the most money in the long run. But sometimes paying down debt is hard. So if you are someone who needs a little bit different technique to motivate you towards your goal, try the snowball approach. That’s a Dave Ramsey term. Focus on the smallest outstanding balance, let’s pay that one off. After that is payed off, find the next smallest outstanding balance and focus on that. You trying to build momentum and roll the snowball. You work at it and motivate yourself to the finish line. Ultimately, I really think it is based on what keeps you motivated and keeps you on track to really take the reins of your financial well-being.
K: What would be your preferred strategy for paying off debt? You talked about the snowball method, is that your preferred method or the avalanche method or do you prefer to consolidate debt?
S: So the best way is to choose the method that is going to motivate you to stay focused and get control of your finances and pay down that debt. The snowball method works really well and it is great coming out of college or when there are a lot of different balances to manage. Debt Consolidation is another method that can help people work to get a hold of their debt. This is a good technique, because people only have one creditor to work with and sometimes we can term out the payments. This can help get the monthly payment to a comfortable amount. You can always pay more than the monthly minimum but you want to make sure you have flexibility to manage your finances.
Personally, I am at the stage where my family and I are doing home improvement projects. We followed the easy process and took out a home equity loan from FCCU to do a home project. We have a list of 5-6 other projects that we want to do. Before we start our next project we want to pay off our last project. For our next project we may even take out another home equity loan. While debt can be scary, it can also be a great motivator. We have three kids so we use our house a lot. Debt like this motivates us so it comes back to what motivates you to manage your finances.
K: Generally, how much debt is too much debt and at what point does that debt start hurting my credit score?
S: That is a really good question with a really hard answer as every person’s situation is different. In general, too much debt depends on how you manage that debt. Some people have a lot of personal debt but manage it really well and they are comfortable with that. For example, doctors come out of med school with huge student loans but they typically can manage that debt. You always want to be careful. Make sure you make your payments on time, every time. Do not miss a payment because that will affect your credit score. When using your credit cards, be careful to never max out your cards because your credit score will look at the capacity of those cards. If you have three credit cards with $5,000 limit on each, do not max out one. You would be better off putting $1,000 on each card and spreading out that spending. If you do have issues making a monthly payment, talk with your creditors ahead of the time. They want to get paid so communication is always key. Most creditors will work with you to try and work things out if you are having a rough month. You do not want negative activity recorded on your credit score because you missed a payment or did not communicate with the collection agency. These activities are really important to stay away from.
K: Student debt, given the option, how aggressively should one be paying off their student debt?
S: This question has varying opinions as student loans are a hot topic. If you are a North Dakota resident, the Bank of North Dakota has a very good student loan program. You can consolidate your loans there, their terms are really good, and the rates are competitive. Personally, I do have student loan debt. It is my smallest payment with the lowest interest rate so I just let it ride. If I am able to pay down that proactively, I am going to but I am going to pay down an auto loan or a credit card loan or a home equity loan first. We did a podcast on this before that’s a great resource to go back and listen to.
K: Investment vs Paying Down Debt: if I get a bonus at work, should I invest it and let it grow or should I go pay off my debt on a loan?
S: Again you will get varying opinions on this. Personally, I am a very big advocate for paying down consumer debt. If you have an investment property, that is a business debt which is a little bit different. Overall, I like the flexibility of being able to pay off that consumer debt. Remember, life happens so having less outstanding debt can make life easier later on. Often time’s people will say ‘if interest rates are low I can get more money by investing in retirement. Maybe I will make 8% in the stock market and am able to pay 4% on my loan and I can make that work.’ That works for some people, but like anything there’s risk and there’s reward. You could make a little more by running your personal finances that way but sometimes life happens sometimes, depending on your investment vehicle, you might not be able to easily access those funds. Because of that, I am a fan of pay down your consumer debt to keep your balance sheet clear. Debt can be stressful so why have it? Get rid of it. Either way, you will start investing and building a net worth for yourself.
K: Big question. What kind of debt, in your mind is the worst kind of debt?
S: The worst kind of debt is the kind is for living expenses that you don’t need and that does not make you happy. Like frivolous spending. We all have had buyer’s remorse. No one likes having buyer’s remorse so image having buyer’s remorse and you’ve financed it, now there is a cost on top of that remorse. Do not put yourself in that situation. You have to live life but it is all about balance. Take care of your physical, mental and financial health but make sure it is worth it and its achieving what you want out of life.
A friend of mine is a great example. When his kids were living in the house, he would take out a vacation loan each summer because it was really important to him and his wife that they made memories with the kids while they were young. He always made sure he paid it off within a year and was responsible about it. This is a great example of good debt, this was extremely important to him and he was willing to pay a little extra and have an outstanding balance in order to spend quality time with his family. He was a small business owner so his paychecks weren’t consistent. Taking out these loans allowed him to manage his cash flow and his personal finances.
K: I read that credit card debt is over 900 billion. How does one combat credit card debt, particularly during the holiday season?
S: Inflation has been running high, the holidays are a higher spending time for most of us and the national credit card debt is growing. Sometimes life happens, and there is only so much you can do about that. If you are in one of those situations, we can help you at FCCU. People recommend monthly budgets to manage finances. Monthly budgets can be hard for some people but one easy way to tackle Christmas debt is to make a budget for Christmas expenses. Think about who are you buying gifts for, how much are you spending on each person, are you hosting a meal, bring a dish to another’s house, are you traveling? Make what is called a project budget for the holiday season and track your spending. If you do not budget year round, doing at this time is a great way to keep yourself accountable. It is extremely insightful to track your spending around the holidays. I like to refer to financial health in the same sense as physical and mental because I think people should take care of them all the same in order to have a happy, healthy life. Having a budget is for your financial health like having a gym membership is for your physical health. It is a tool, one of the best tools to help you take control of your financial wellbeing. The price of the holidays can add up really quickly, especially with the ease of swiping that credit card. That is one of the great things about a credit card, they are easy and efficient but we also want to make sure we are tracking what we are spending. All these tools help to take advantage of your personal finances. Most people have a set wage, whether that is hourly or salary, so we have an idea of what the set amount of money coming in. The piece we can control is how much we spend.
K: Things happen, life happens and debt happens so we just want to remind our readers that we are human, we work in numbers and we understand that debt happens. If you feel lost, don’t be afraid to ask for help.
S: It is okay to ask for help, managing your personal finances is hard and it takes practice but it is so worth to take charge of your personal finances. For most of us we are guarded about our finances but like many things, it is easier to do things and grow when you have an accountability partner. Talk about investing, retirement and debt with people who are in the same life stage as you and you can learn lots without divulging too much personal information. Even talking with your parents and grandparents who have already gone through this stage of life can be insightful. If you respect their lifestyle, ask for their guidance and see what they went through financially. Lastly, you have the entire team here at FCCU who is happy to help. Reach out to us, we would love to look at your personal financial situation and anything we can do to help you out. The name of the podcast is Let’s CU Succeed and it’s a real thing! That’s what we want to do and we want to help you reach your financial goals so let us know how we can help you.