The Whole Person

Debt has certainly become a hot-button topic in America. There are several options for getting out of debt and it is easy to find various writers (who, by the way, are not necessarily experts) that claim to know the best and worst debt solutions available. Here I will share my own insights on the subject of paying off debt, which come from my experiences as a financial adviser, as well as a person who has struggled with his own debt problems. Yes I have tackled the challenge of debt elimination from both sides, both giving and receiving help to get out of debt. Just like being a doctor does not guarantee you will never get cancer or heart disease, being a financial adviser does not mean a person is immune to financial difficulties.

It is with the benefit of those life experiences that I now share with you a comprehensive list of ways to pay off debt, but I’m not going to tell you that you absolutely should or should not utilize any of these tactics. The truth is that they can all work in the right set of circumstances, and sometimes a combination of methods is the best solution. Other times, a person will only qualify for one or two of these options. My own little bit of debt counseling to you is to thoroughly research whatever techniques presented here sound like they might be the best choices for you; then compare the approaches as they relate to your specific situation, and don’t be afraid to ask for help along the way. Financial decisions of any kind are not to be made in a vacuum.

Here are most of the alternatives you have to become debt free:

The Snowball Method. This involves paying of your account balances starting with the highest interest rate, working your way through to the creditor with lowest interest rate. Along the way, you make the minimum payment on all accounts except the one with the highest interest rate you are focusing on at the moment.

The Rollover/Rolldown Method. Here you begin by paying off the smallest balance first (again making only the minimum required payments to your other accounts) and work your way up (or down, if you prefer) to your largest balance. Mathematically, the snowball method works faster, but often in the real world people get better results with the rolldown approach because you get a psychological boost by paying off the first small balance and seeing results relatively quickly.

Debt Consolidation Loans. If you qualify, your bank may give you a debt consolidation loan to payoff credit cards, car loans, and other personal loans. When you do, you end up with one monthly note to a single lender instead of multiple monthly payments to different creditors. You wind up with the same total debt load, but you get a new interest rate, a new term (time frame) for re-payment, and a lesser monthly out-of-pocket obligation to service your debt.

A Home Equity Loan is similar to a debt consolidation loan, but since the loan is backed by your home equity, it is more secure for the lender, meaning you’ll benefit from a lower interest rate. And, don’t forget that the interest payments are probably tax-deductible for you.

Life Insurance Cash Value. If you own a life insurance policy with cash value, you can borrow from the policy to pay off debts. The advantage here is that the net interest you pay back to the insurance company is much less than what you would pay back to a bank. Plus, since you own the policy, you have several options to pay back the loan, on your own terms, if at all. However, if you die with an outstanding loan on your policy, the death benefit paid to your beneficiary is reduced by the amount of the loan balance.

Cash Out Savings Accounts. I have to interject here that I don’t much like this idea. Speaking from experience, you always want to have short-term, liquid money available for emergencies. Some would argue that your money is working harder for you by paying off 20% credit card debt, rather than earning 0 - 4% in a savings account, CD, or money market. There’s no denying the math behind that, but a better decision might be to stop contributing to your 401K or other retirement account temporarily and use that money to pay off debt instead. That way, you keep your emergency savings money.

401k Loan. Most 401k programs allow you to take out loans. Qualifying conditions of the loan and the terms of re-payment varies by each specific 401k plan. Just remember that you are borrowing out pre-tax dollars, but you will probably be paying back that loan with after-tax dollars, so you lose your tax benefit on any loan amount taken from your 401k.

Factorial Math Method. This involves examining all the factors that make up your debt including all your different balances, interest rates, terms, and payments; whereas the snowball and rolldown methods simply focus on one factor (interest rates and balances, respectively). By the numbers, using factorial math is the fastest “do-it-yourself” debt solution. The problem is, without an advanced debt pay off calculator or the right software, there is no way for you (unless you happen to be a mathematical engineer) to figure out the ideal debt elimination combination. If you are interested in learning more, I recommend you check out software from United First Financial that uses a factorial math engine.

Credit Counseling/Negotiation. Generally, not a “do-it-yourself” approach. This involves hiring someone to work with you and your creditors to get you better interest rates, terms and payment plans so you can free up monthly cash flow for yourself and/or to make extra payments on your principal.

Debt Settlement. Definitely not a “do-it-yourself” approach. You will need to rely on a debt settlement specialist who will negotiate lower balances on your unsecured debt on your behalf. On the plus side, you lower your actual debt (balances) by 30 -70% and you do not deal directly with your creditors (no harassing phone calls from collectors). The downside is that your credit score takes a hit and your credit is frozen during the settlement process (about 12 to 24 months).

Bankruptcy. The last, but sometimes necessary, resort. Bankruptcy laws have gotten tougher, and a “BK” stays on your credit report for 7 years…certainly not recommended. But if you must, talk to an experienced attorney about it.

Like I said before, if you are looking for the way to pay off debt that is going to work best for you, I suggest you research these options, seek advice from someone who is qualified, and carefully consider all the variables before making a decision. The eventual reward is worth the work.