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How to Pay Off Debt

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Debt is one of those things that no one wants to talk about--but we need to, so we can help you manage it wisely.

The first thing you’ll need to do is arrange your nondeductible debt in order of highest to lowest interest rate. The account with the highest interest is the one you should focus on paying off first.

Once the highest interest debt account is paid off, take the money you were paying to that account per month and add that to the monthly minimum for account #2. Pay this to account #2, until that account is paid off.

Follow this same strategy for the rest of the accounts on your list. This first approach is called the “avalanche approach”. Over all, you may save the most money this way, but paying off a larger balance to start can be intimidating.

Some people find it emotionally satisfying to pay off accounts quickly, so they start with the smallest balance first, rather than the account with the highest interest rate. This approach is sometimes referred to as a “debt snowball” strategy.  It can be more motivating, but you may wind up paying more interest this way. 

Regardless of the strategy you use, make sure you make the minimum required payments for all of your debts.  By paying more than the minimum, your debt payoff will increase more quickly.

You can follow the same approach for other deductible debts like most mortgages and student loans.

To learn more about how to take control of your financial future, check out the other videos in our Finance 101 series.

On this episode of Personal Finance 101, we take a look at Schwab’s suggestions for how to manage your debt wisely.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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