Let’s Talk Debt

For this week’s #FinancialEdFriday, we’re taking a closer look into debt. It can be a daunting subject, but debt can open a lot of doors if you know how to manage it properly. You don’t have to figure it out alone, we’re here to help you understand the nuances of debt.

You may have heard debt referred to as “good debt” or “bad debt”. Typically, “good debt” is referred to as something that has the potential to be an investment into your future or an appreciating asset – something that grows in value. Whereas “bad debt” is typically referring to something that doesn’t grow in value. However, these definitions can be misleading, as debt is more nuanced. There are many reasons why people take out debt, and often there is more to the story than “good” versus “bad”. It isn’t necessarily the type of debt that makes it bad or good, but rather why you are borrowing/what the debt is used for, and how you are able to handle the debt afterward.

Types of Debt:

When thinking about debt, it is categorized into either “open end” and “closed end”.

Open End

A type of debt that can be borrowed upon repeatedly. It is revolving credit, this form of debt has no definite end date. I.e., credit cards and lines of credit.

Closed End

This is where the debt has a specified end date for repayment with interest. Closed end credit is also known as installment credit, you borrow a specific dollar amount and repay in equal installment payments for the term of the loan. I.e., auto loan, personal loan, mortgage, etc.

Questions to consider:

An important component to taking out a loan is to consider the pros and cons of the debt, and if the reasons that you are taking on the debt is worth it. Here are some good questions to ask yourself if you’re considering taking out a loan:

• Why are your borrowing?
  • Is this for a need or a want?
    • I.e. a car repair might be a need while the latest and greatest 65″ TV may be a want.
  • Will this move me closer to my financial goals?
  • Does this align with my personal values?
    • If you value family, a family vacation or an RV might be well worth it, etc.
• How are you able to handle the debt afterward?
  • Can I easily repay the debt or am I willing to make the sacrifices (long term) needed so I can make the payments?
  • Will repayment strain your budget?
  • Is the time spent repaying the loan and any potential interest paid worth it for the value of what you purchased? (Not just financial value but also emotional or psychological benefits. For example – was the vacation worth a few years of repayments? Did you make countless amazing memories with your family in the RV even though it deprecating asset, or did it just sit in a garage and not get used?).
• Will I have something of value when the debt is repaid?
• Can I postpone the purchase until I can save enough money to pay for it with cash?

Asking yourself these questions can help identify the root of why you are making the purchase. It can be difficult to stay on track with your financial goals, but these questions can help you determine whether the possible cons of the debt are worth it and help keep you moving in the right direction toward your financial goals.

How to get out of unwanted debt:

If you’re in a tough spot with unwanted debt, here are a couple of common methods to help manage it:

Debt Snowball Method:

This method involves starting small and working your way up. In this situation, you would make minimum monthly payments on all your debts and use any extra funds to make an additional payment on your smallest dollar debt. When your smallest debt is paid off, you would roll those additional funds over to the next smallest, and so on until you’ve paid off your debt. The reason why you start with the smallest debt is because it is the quickest to pay off, meaning less interest can accrue and will free up additional funds to apply toward the next smallest debt. It will also make your debts more manageable by having fewer payments to make each month.

Debt Avalanche Method:

This method is like the snowball method, but rather than targeting your smallest debt, you target the debt with the highest interest rates. In this situation, you would make the minimum monthly payment on all your debts and use any additional funds to pay more to your debt with the highest interest. Once the highest interest is paid off, you would then move onto the next highest, and so on. This method helps minimize the interest that will accrue across your debts by paying off the highest rate first.

While those methods are helpful in creating a strategy, understanding your financial situation is vital to managing your debt.

Create a budget:

Track your income and expenses to ensure you can afford your debt payments.

Alaska Air Group Credit Union is here to help you. We have great financial education tools to help with all stages of your financial journey. View a few resources below or visit https://aagcu.banzai.org/wellness to access countless financial education resources.

Understanding the nuances of debt is crucial for making informed financial decisions. By focusing on effectively managing all forms of debt, you can achieve financial stability and peace of mind.

We understand getting out of debt can be overwhelming, and we are here to help. Contact the Loan Department at (206) 824-9800 option 1, or email loans@aagcu.org and we are happy to discuss your options and next steps on your debt journey.

Keep an eye out for more #FinancialEdFriday’s throughout March!

Questions?

If you have any questions, feel free to contact us at (206) 824-9800 or by email at info@aagcu.org.

Have any other topics you want us to explore? Let us know below!