Hi, my name is Mei Carmer, and I am an Associate Financial Advisor here at Katterhenry Investment Group of NEST Capital. In case you missed our Finance 101 seminars, you’re in luck. Welcome to Episode 4 of our 8 episode video series highlighting the various topics we discussed. In this video, we will talk about debt.

                First off, what is debt? Debt is money that you owe to someone else after borrowing it, and usually you pay interest on it. Debt could look like a credit card, student loans, or your mortgage. These are just a few examples and for this video, we are going to discuss credit cards and loans as a general category. When it comes to credit cards, you can avoid going into debt and having to pay interest by paying the balance off in full each month. Credit cards can be a great way to earn rewards and bolster your credit score, but can be risky if you use them to buy more than what you can afford. Try to think of your credit card as more of a debit card and only use it if you have the money to pay it off right then. Credit cards carry high interest rates, making repayment higher and harder to get out of debt. Loans will have a monthly minimum payment; pay at least this amount. If you want to pay off the loan faster, try to pay extra, and you’ll pay less interest in the long run.

If you are trying to focus on paying your debt faster, there are two main repayment strategies: snowball and avalanche. The snowball method is when you order your debts by dollar amount from smallest to largest. Make your regular monthly payments. You then put the extra money towards your smallest debt. Once the smallest debt is paid off, you put that payment plus the extra towards the next smallest debt. You keep doing that until your debts are paid off. Like a snowball, you pay off your debt smallest to largest. The avalanche method is where you put your extra debt payments toward your highest interest rate debt first and work down to your lowest interest rate debt. Like an avalanche, you pay off your debt largest to smallest.

Now when it comes to paying off debt it is important to understand the concept of amortization. When paying off your loan, part of your payment goes towards interest and part of the payment goes towards the debt’s principal or amount borrowed. At the beginning of the loan, most of the payment will go towards the interest, and over the life of the loan, it will flip and most of the payment will be the principal. An example of this is if you have a $10,000 loan with a $500 a month payment. In month 1, $400 might go towards interest and $100 might go towards the principal. In month 5, $250 might go towards interest and $250 might go towards principal.

Now if you find yourself struggling with your debt situation, here are some ideas to help. One, consider speaking to a debt counselor if you feel overwhelmed; they can help process what you’re going through and help you come up with a plan. Two, try not to take on more debt, as it will be harder to get out of it. Three, consider looking into refinancing at a lower interest rate or consolidating your debt. Sometimes you can get a promotional low to zero percent interest rate when you combine credit cards. This has been episode 4 of our 8 episode Finance 101 Video Series. Episode 5 will discuss things to know about your career.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Katterhenry Investment Group of NEST Capital is a separate entity from WFAFN.

 

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