Question: Colin in Ludlow: I have credit card debt on multiple cards. Any suggestions for how to pay these off?
A: You essentially have two different strategies at your disposal. One is commonly referred to as the “snowball” method. The other is called the “avalanche” method.
The snowball method works like this: Make a list of all your cards and put them in order of the smallest to largest debt owed. The goal here is to eliminate the smallest debt first since, in theory, that should be the easiest to achieve. Then, while you keep making the minimum payment on all the other cards, put as much extra money as you possibly can toward paying off the card with the smallest debt. Once that card is paid off, you move on to the card with the next-smallest debt amount and so on.
Amy Wagner and Steve Sprovach, Allworth Advice
The avalanche method takes a similar approach – but in this case, you should list all of your cards and put them in the order of the highest to lowest interest rate. Then, you would put any extra money toward the card with the highest interest rate while making the minimum payment on all your other cards. Once that initial card is paid off, move on to the card with the next-highest interest rate and so on.
Now the question becomes which approach should you choose?
If you’re looking for the most financially prudent option, go with the avalanche method. That’s because you’re eliminating the most harmful debts first, which essentially means you’re saving money in the long run.
But just keep in mind that this tactic may take longer to accomplish, so if you don’t have the right mindset, it could be easy to become discouraged with your progress.
Therefore, if you’re someone who needs to see some early success to stay motivated, the snowball method might be a better choice since it’s designed to give you small “wins” right off the bat. But the downside is that it will likely take longer to become debt free.
The Allworth Advice is that, in a perfect world, we would recommend the avalanche method. But we understand that everyone is different – and you know yourself better than anyone.
If the snowball method will work better for you, that’s fine. All that matters is that you pick an approach and stick with it. Good luck!
Q: Julie from Taylor Mill: My son is living on his own for the first time. Any money advice I can pass on to him?
A: What an exciting time for your son! The Allworth Advice we hope you share with him is our 50/30/20 rule: 50% of his income should go to “needs” (rent, utilities, car payment, groceries, etc.); 30% to “wants” (going out with friends, the latest and greatest smartphone, etc.); and 20% should be saved (emergency fund, retirement and/or a short-term goal).
This rule is an easy way to get his spending and saving priorities straight from the get-go. And while the “wants” percentage is negotiable (it can be less if his bills are higher), the percentage he is saving (20%) should not be negotiable.
And assuming he’s in a low tax bracket right now, he should take advantage of any Roth investment options (such as a Roth 401(k), a Roth IRA or, if he works for himself, a Roth Solo 401(k)). Since he’s so young, this money will have decades to grow tax free!
If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to [email protected].
Responses are for informational purposes only, and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC-registered investment advisor adviser. Securities offered through AW Securities, a registered broker/dealer, member FINRA/SIPC. Call 513-469-7500 or visit allworthfinancial.com.
This article originally appeared on Cincinnati Enquirer: Allworth Advice: How should I pay off my credit card debt?