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  • Kimberly Stone

Debt Reduction May Be Your Best Investment

Investors are increasingly uneasy about the ups and downs of the stock market. If you're worried about your investments and want to reduce your debts, you're in luck.

Debt reduction gives you a guaranteed rate of return that is usually better than most investments. By paying the balance on a typical credit card, you'll save about 10-18 percent interest on the amount you pay off. Where else can you earn a guaranteed return of 10-18%?

Debt reduction also buys security. A low-debt family earning $80,000 a year can be financially stronger than many high-debt families earning twice as much. If you lose your job, your level of debt can make the difference between temporary discomfort and financial ruin.

To reduce debt, you should first avoid buying anything you can't pay for in 30 days. Then start working to reduce your existing debts. The top two strategies for paying down balances are the debt snowball and the debt avalanche.

With the debt snowball, you order debts from smallest to largest balances. You can gain valuable momentum as you pay off smaller balances first while making minimum payments on the remaining debts. Then apply any funds freed up towards the remaining debt in order from least to greatest.

With the debt avalanche, debts are ordered by highest interest rate first. Each month, pay as much as you can on the debt with the highest non-deductible interest rate, covering only minimum payments on the others. When you've retired the first debt, start on the one with the next highest rate. Continue the process until you've paid off everything but your home mortgage which you can then start to make extra payments on as well.

If you transfer high-interest credit card debt to a low or no interest card, you can avoid some interest charges while working on the snowball method. Another approach is to take out a loan with a lower interest rate to pay off multiple debts at once.

The best technique for paying down debt is one that you will stick with and that you can start as soon as possible. As individual circumstances may vary, consult a professional to help you set realistic goals and help you work to achieve them. Contact us for help with your annual income projections.

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