Debt Elimination

The most important thing for anyone with consumer debt (i.e., credit cards) is to pay this debt off as fast as possible with either the debt snowball or the debt avalanche.

What’s the difference? With a debt snowball debts are listed from lowest to highest balance. All extra money is applied to the smallest debt while maintaining minimum payments on the rest. After the smallest is paid off, that money is rolled onto the next smallest balance and so on.

With the debt avalanche, the debts are listed of highest to lowest interest rates. Apply as much as possible to the highest interest while maintaining minimum payments on the rest. After the highest interest rate is paid off, that money is rolled onto the next highest interest rate and so on.

Cash Flow Optimization

Here is where the two schools of thought emerge. After saving 15% in retirement accounts, Dave Ramsey listeners would pay off their home mortgage early. Eliminating all debt is the eventual goal of the 7 baby steps.

But with interest rates at historic lows, many Ramsey followers are learning to optimize cash flow with a low interest rate 30-year mortgage payment. The purposes are varied. For us, it’s about catching up with retirement savings. For others it could be about increased travel opportunities, saving faster to buy a car, or even start a side hustle.

Whatever the need, optimizing for cash flow after paying off credit cards is not fundamentally wrong. Many experts like Ramit Sethi are recommending this as a way of what he calls “living your rich life.” The main caution for staying in debt with a mortgage is the risk of loss of employment.

Whichever path you choose, start with why. Your why! That is, know your purpose for selecting cash flow optimization or continued debt elimination. And continued in one direction long enough to know whether your choice is accomplishing your objectives.

Let us know what you think!

As Always…

Thanks for reading! I hope this information provides food for thought. Remember that I am not a certified financial planner, a certified public accountant, a licensed real estate agent, etc. My content is for educational purposes. I am a math educator who happens to have a finance degree. Like they say, never take financial advice from a math teacher! (Do they really say that?)

But you should spend less than you earn, invest the difference, and stay out of debt!

I would so appreciate your sharing my content with anyone you feel could benefit. And if you would like a free exploratory conversation or just want to shoot the breeze about personal finances, call me and leave a message or send a text to 570-731-0425.