The "Best" Way to Pay Off Debt and the Stress Impact Method

Some would argue that there are as many ways to get into debt as there are people. I personally think that all of these reasons boil down to one of two things: living beyond your means and unexpected hardship. Let's look at student loan debt. This would fall into the living beyond your means category. It's for a good cause, investing in yourself, and can even help you build your credit. But let's face it, no one likes to see their monthly bill years after college and realize they are still paying for their education. Yet for either of those reasons, nothing feels better than paying them off. So let's take a look at the two most common debt repayment techniques and analyze them.

There are two techniques that have garnered the most attention: the Debt Snowball and the Debt Avalanche.

Debt snowballing is a debt repayment technique that involves paying off your smallest loans first. The idea behind this is that many people need a boost to encourage them along the way. When payment is tough and you lose sight of ever getting out of the red, that quick boost of paying off a small credit card balance or a utility bill keeps you going. Plus, once that small thing is paid off, you can transfer the payments you would have normally used for that to apply to your next smallest debt helping to repay that faster.

The debt avalanche supports paying off your highest interest rate first. The logic behind this method is that by paying off your highest rate, you will avoid paying extra interest. Lowering your interest payments means you can pay more on your second highest rate and so on until you are debt free. You will pay less interest overall and get out of debt faster than any other method.

The "Best" Way to Pay Off Debt and the Stress Impact Method

I would also like to present an additional option that will surely be met with disdain from most of the debt-fighting population. Let me direct you to the stress impact method. I'm bolding that because I came up with it myself and am inordinately proud. The idea is a hybrid of two factors that I think are important. It involves pay off the debt that is causing you the most stress first and paying off what will make the biggest impact to your bottom line or your credit report. Let's look at these factors individually.

Stress factor. I would argue the merit of the debt snowball for one main reason - it has emotional impact that the debt avalanche misses. I know there is a battlefield with very vehement supporters of both who are always at odds. However, I would still argue the merit of this to most people in debt since the reason for it is 10 times more likely to be based on emotion rather than circumstance. Enter stress based debt reduction. The debt snowballs focuses on the smallest debt to get that first small win. I would suggest the largest stressor. I know people who have mounds of student loan debt that can make their minimum payments, but have one store credit card with a balance that keeps them awake at night. What about that car loan you shouldn't have taken out that makes you angry every time you think of it. Make it a goal to lower your stress, thereby increasing your motivation and determination to keep going by paying off the most emotionally impactful debt.

Impact factor. Which debts impact your financial well-being the most? For example, showing a history of on-time payments for a credit card, but being late for your mortgage shows up as a huge difference on your credit report. When times are tough, you always move back to your core which is shelter and utilities. How about the interest rate? If your car loan is at 2% while your credit card is 22%, that will also have a large impact depending on the balance of those accounts. To get ahead, you need to be mindful of how each debt affects you.

Put it into action. The first step is sitting down with a list of all your debts. That list needs to include what the debt is, what your monthly payments are, the total amount of debt, and the interest rates.

The "Best" Way to Pay Off Debt and the Stress Impact Method

For this example, we have four accounts. Both the debt snowball and avalanche methods would attack the credit card first. This might be a great first move. You pay off the highest rate first while also giving yourself that kick to get you going. But let's consider a narrative:
In your mind, credit cards are used in emergencies. Last year when your car gave up the ghost in the middle of the road, you had to have it towed to a mechanic (which hurt) and have major engine surgery (which really hurt) before you could drive her again. You didn't have the money in your checking account so you paid on a card and are paying it off. That car gets you to and from work every day. It needs to be reliable so you can be too. 
The store credit card was something you got so you could get 10% off the shopping spree you never meant to take while you were feeling down. You did some shopping therapy and are still paying for it a year later. 
Both of these situations caused a credit card balance. Now, if you have the will, pay off your normal credit card first. It will do you the most good and help you pay down your debt faster. However, if you really can't stand the store card, it won't leave you alone and you regret every payment, pay that off first. It will give you the motivation and fortitude you need to move on.

Once you've taken care of that, let's look at the student loan and car loan. They have the same balance and the same rate.
While in college, you had the opportunity to work your way through school. Instead of taking advantage of that, or scholarships, or living with roommates, you did not. Investing in yourself was a good decision. Using debt to pay it was not.
Your car finally died. After a few solid hours of mourning, you headed out to find the next one. Unable to buy it up front, you chose the best financing options available. Just like fixing your old one, having a car is a necessity and if you have to pay extra then so be it. 
Here's where you have to make a decision. What is more important to you? If that student loan is the thorn in your side, then maybe that should go first. But if you can hold off, paying your car loan will benefit you more. Student loan debt is seen as a positive investment from a credit standpoint and can increase your score or help start building credit if you are younger. Your car loan can do that as well, but doesn't count as much. In addition, your car loan cannot be deferred if you go back to school or lose your job. In this case, impact should take precedence if you can stand it.

I am a firm believer that the debt avalanche is the smartest way to go. It's got the numbers to back it up and I like anything that is highly logical. Yet, humans are no so. We make decisions largely based on emotion and that can trump good planning every time. Looking at debt as both a financial and psychological hurdle may muddy the waters, but it might just offer another way to view the path to financial freedom that works for you.

Trivia Tuesday

Does it like games, Precious? Does it? Does it like to play?

Test your money mettle.

  1. Pennies are made up of only 2.5 percent copper. Which other metal makes up the bulk?
  2. The Massachusetts Bay Colony issues the first paper money in the Americas in what year?
  3. What's the average life span of a dollar bill?
  4. In addition to the Treasurer of the United States, who else has his or her signature appearing on U.S.    currency?
  5. Who was the only woman whose portrait ever appeared on U.S. paper money -- a silver certificate, specifically?

Trivia Tuesday -

And now for the answers. For any you get right, give yourself a gold star or a purple ribbon or whatever it is that really gets you hot about being right. Maybe it's just validation. So here: You were right! Aren't you just smarter than Einstein and better looking than a really good looking person. Go you.

  1. Bronze
  2. 1660
  3. 6 months
  4. The President
  5. Mary Lincoln

Did you get any right? I sure as hell didn't, but maybe I'll remember these for the next party where I have to impress people.


Pump Up Your Cross-Media Strategies Conference Recap

I had the pleasure of attending a conference recently about ways to increase your marketing capabilities using new and existing tools, as well as some great business advice in general. Conferences don't always hit the mark, but I love attending since there is always something to learn. This one in particular was worth-while though. I wanted to post a bit of a recap because I think our presenters really nailed it and it's a way for me to reference them in the future. 

Dave Yunghans, Constant Contact

Dave was our opening presenter. I'd met other business people who were impressed with his knowledge and personality, and now I can see why. Dave is incredibly personable. The largest takeaway was that over 90% of all the billions of e-mails that people send out through Constant Contact a day are done wrong. I've said before that people are buying more than ever but none of us want to be sold. However, that's exactly what most businesses are doing. If every e-mail you send it a pitch, no one will read them. 

Dave's number one piece of advice is that these communications are the start of a conversation. The way to open up that line of communication is to present free, relevant information. Once you become the expert on something, people will remember and come back. Once they're in a position to need your services, then they already know you and bam! 

Donna Serdula, LinkedIn-Makeover

Two years ago, I started a Linked-In page at the suggestion of someone I met at a networking event. I knew I would be looking for a job after my internship and thought it would be a good idea. Fast forward a year later and I am on Linked-In usually once a week. My profile is has been at "all-star" status for a long time. I found that Linked-In was a great way to keep in contact with fellow professionals and clients. 

Despite the fact that I have learned a lot of tricks along the way, Donna's advice could help anyone. Things like you profile is not your resume is a big one to remember. She also encourages having a professional headshot and engaging tagline, as well as gives advice on how to use your connections to gain clients or business. Her website also has more great tips to help you build your best profile and make it work for you. 

Bob Kanoff, Mobile QR Solutions

Mobile websites are something that I am aware of, but very disconnected from. Since I still have an ancient flip-phone, I tend to not pay attention to such things. However, it seems like everyone has a smart phone now that is capable of so much more than making calls. Mobile sites are quickly becoming necessary since most people will immediately navigate away from your business page if it is too hard to read on their screen. 

If you run a business, this can kill you - especially if you are losing sales because they can't or won't buy from their phone. The more prominent this issue is, the easier it's becoming to fix it. There are a million websites out there now that help you see what your customers are seeing and free or low-cost ways to reel them back in with a new look. In addition, many companies can assist you with a fully integrated mobile design.

Thanh Nguyen, The Standard Group

Hey smartphone users, ready for another one? QR Codes. I've just become aware of what these things really are in the last year, but I'm starting to see that the possibilities are endless. QR codes are not just limited to the simple box format I'm used to seeing. Since most apps can read the codes even with some interference, that means that you can use different shapes, colors, or even put your own logo into it. Not to mention that there are new ways to track scans and help lead people to the actual content you want them to see. The key with QR codes though is to give people something special. If you place your code next to your website, don't direct your QR code to the website main page. There would be no purpose. Instead, direct them deeper into your content, get them a free download, or lead them to a video. Keep people engaged and they will come back. 

Dean Frey, The LIFE Company

It's so easy to get caught up in life and only view the world in one way. I think it's part of human nature, especially when learning can be seen as unpleasant, that you want to keep your head down and plow through. However, you can miss some of the best things in life. Balance is a huge part of maintaining your life and motivation long-term. In addition, retraining ourselves to look at all things as connected can teach us things we would have never known to look for. 

This conference was organized by Chuck and Alice at KeyConnections4Me. I've been to several of their seminars and have always walked away with great new information. If you are in their region, go check them out. You won't be sorry.

Getting Money on the Ground in our Hispanic Communities

As of February 2013, Biz2Credit formed a partnership with the Latino Coalition to offer more lending opportunities to Hispanic-owned businesses. Working in community and economic development, my ears immediately perked up. After watching this video, I found some of the information needed more research to be clarified. So let's start at the top, shall we?

The Latino population has more effect on the U.S. economy than ever. Hispanics are the fastest growing population in the country, numbering over 50 million. As such, they are also the fastest growing entrepreneurial demographic creating businesses at nearly double the normal rate. As of 2010, they comprised 2.3 million of the 27.1 million U.S. businesses. Over the last five years or so, Latino business' revenue jumped by an astonishing 55% to nearly $350 billion, though some believe even that number could be understated.

More than 20 % of all businesses in New Mexico, Florida and Texas are owned by Latinos, and even in the state with the largest economy, California, the figure is fast approaching 20%. Source

"Of course, the economic benefits from the dynamic growth of Latino businesses are not limited to the Latino community: one study in Los Angeles showed that growth of Latino owned businesses is a major factor in helping the city to recover from the devastating effects of the recession on its economy. The positive trends caused by Latino entrepreneurship can benefit the entire national economy and help the country to start growing again," says Forbes. So it would make sense that getting capital to worthy Latino businesses would be a good thing for everyone.

Lending to the "right" businesses is much more complicated than it sounds. Though banks are loosening their grips on purse strings for capital, large banks are still not equipped to handle the micro-loans that many of these small businesses require. That's where this Biz2Credit Initiative comes in to play. Originally, I thought the partnership was between the SBA (Small Business Administration) and the Latino Chamber. However, this Biz2Credit is not directly through the SBA, nor is it new.

Biz2Credit is an online application system that streamlines the process of applying for a loan. Working with a network of banks and economic developers, standardized loan applications are graded and matched up to potential lenders. This allows potential borrowers easier access to a variety of institutions while also allowing lenders to review applications quickly. The site also allows certified SBA lenders to weed out qualified projects. SBA loans are notorious for having many requirements and paperwork needed to apply. By narrowing down to only eligible projects, it saves business owners and lenders time and frustration.

The new initiative with the Latino Coalition has created an additional Biz2Credit website in Spanish. Since many Hispanic business owners are not comfortably fluent with English for business, this opens up more opportunities for the Latino market to gain access to capital. This has the possibility to increase prosperity and jobs into communities that might lag behind in the recovery otherwise. It also add a more dynamic element into our small business landscape by increasing diversity. If the research is true, we can all look forward to benefiting from stronger communities everywhere.

Winks to Grow On 4-10-13

Winks are Wednesday link round-ups for relevant reading to get you over your mid-week slump. Check out the links below for some great reading about improving yourself and your business.

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A Quick Study in Interest Rates and a Public Service Annoucement

There are several major theories on the most effective way to pay off debt. They make for very good reading, but I want to quickly touch on two other topics: simple comparisons and debt shaming. Let's start with the easy stuff.

I am sometimes surprised by how much some people seem to hate numbers. Literally, I cannot begin to tell you how many people have talked about "you finance people" like it's the new clique in school who shoots you dirty looks. They are amazed at some of the things you can do with spreadsheets and how you can keep it all straight. I feel the same about cars and history.

This in itself is not a bad thing. We all have areas where we excel. However, not understanding something can quickly lead into unpleasant areas you didn't expect. Recently, I had a conversation about student loan debt wherein this person had two loans with the same interest rate. Without the fine print in front of you, you cannot be certain of all the details. However, I had to explain numerous times the concept of how much interest would be paid between them. It took three examples to get the point across that it is the same. So when you are truly comparing apples to apples, meaning all the fees, ect are the same, it will work out like below.

Let's do a quick example:

Scenario 1

Scenario 2

Scenario 3

It's a topsy-turvy world. Now remember how not understanding can lead to unpleasantness? Think politics, religion, love, and anything else that results in defamation, death, or desolation. Those are more extreme examples, but the concept of debt shaming is a rising trend that I find particularly disheartening.

The person with these student loans felt bad about paying them off in the "incorrect" order according to his father who also did not understand the above examples. It immediately brought to mind the debate on whether to pay of the smallest loan first or the one with the highest rate. That's a conversation for another day. What I feel very strongly about though is that debt is an epidemic in this county - one most of us face at one time or another. It is a hard and often emotional thing to go through. Debt shaming for not doing it the "right" way is counterproductive and hurtful. It has the added bonus of making a person afraid to speak to others about their goals and progress, making it even more likely they will miss out on good advice or slip back to old habits.

I advocate for paying off debt in the way that makes it most likely that you will achieve your goal. Don't be afraid to find a way that works for you because you are the only one who knows whether it is a regimen you can commit to or not. Control your own life and remember to tread kindly.

Winks to Grow On 4-3-13

Winks are Wednesday link round-ups for relevant reading to get you over your mid-week slump. Check out the links below for some great reading about improving yourself and your business.

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