338 | How to Tackle Multiple Debts

Paying off multiple debts can feel overwhelming.

Creating a strategy makes all the difference.

In this episode, let’s talk about popular payoff approaches, the motivation behind choosing a strategy, and a common habit that will slow your progress.

• • exploring two popular debt payoff strategies

  • the strategy that helps you make the fastest progress

  • the common mistake that slows lawyers’ progress with their debt

  • simple steps to get started with tackling your debt

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You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back. Today we are talking about a topic I get asked about a lot, and that is how to handle paying multiple debts off.

So you probably have more than just a single debt. Most people have a car loan, maybe a couple of credit cards. You’ve got student loans, and those student loans are likely multiple student loans. Like I had 14 different student loans. If you didn’t consolidate, then you probably have something like that as well.

And so when we’re thinking about what to do with all of these different loans, everyone wants to make sure that they are handling them in the best way possible. I’m going to talk about how I recommend handling your debt, and I want to start first with the popular debt repayment strategies out there, which are the debt snowball and the debt avalanche.

With the debt snowball, you pay your debts from smallest to largest balance without regard for the interest rate. So even if it’s a lower interest rate debt, if it has a smaller balance, you’re tackling that one first. With the debt avalanche, you are paying your debts from highest to lowest interest rate without regard to the balance. Even if it’s a really high balance, if it’s got the highest interest rate, that’s the one that you tackle first under the debt avalanche method.

I personally am a big fan of the debt snowball because of the psychological effects of seeing those debt balances get paid off quickly. When you start with the lower balance, it doesn’t take you as long to pay it off, and so you get to see that $0 balance on your credit card statement, or you get that paid in full letter for a car loan or a student loan or whatever. Getting that kind of momentum, seeing physical progress, does something to your mind, and it helps to motivate you to keep going, so I’m a big fan of the debt snowball method, and by and large, that is what my husband and I use to pay off our debts.

I make that slight caveat because there were times where we had a lump sum that we were able to knock out a debt completely, and so we went out of order and we went ahead and paid off whatever that debt was because we had the money to do so. There were also a couple of strategic moves that we made. Specifically we had maybe three student loans that were about the same balance as each other, and then those three student loans combined were about the same balance as my car loan, which would be the next biggest one.

And we decided to go ahead and pay off that car loan instead of those three smaller student loans because the minimum payment on the car loan was much bigger. Like the minimum payment was something like $400, and I think combined those student loans might have been $150 or something like that, so we decided to tackle that car loan first. You’re allowed to make decisions like that, but again, overwhelmingly the debt snowball is going to be better in terms of that motivation to keep going.

Now, let’s talk about a common mistake that people make with paying off multiple debts. If you’ve got multiple debts and you’ve got enough money left over at the end of the month, or you’ve got this lump sum that has come in, maybe you got a bonus or a tax refund or something like that, do not make the mistake of splitting that money across multiple debts. I’m going to pay 200 extra on this one and that one and that one.

No. Don’t do that because you are diluting your efforts. You are making it take way longer to pay things off, and you don’t get the satisfaction of any of those debts being paid off completely. When you are making your extra payments, make it on the one debt that you are targeting.

Whether you’re doing that debt snowball with the lowest balance, or you’re doing the debt avalanche with that higher interest rate, or you just have some other debt that you want to target, you put all of your extra towards whatever debt you’re focusing on, and all the rest of them you just pay the minimums. That way, you’re going to get that paid off more quickly, and you’re going to see that progress.

And then, on top of that, besides seeing the progress, you’re going to free up the payment that’s going towards that debt. Because once it’s paid off completely to zero, you don’t owe anything on that one anymore.

Now, how do you get started? Let’s say you’ve got multiple debts. You’re not sure how to handle them, how to manage them. You’ve just been paying the minimums that the bank tells you to pay, and you’ve been making extra payments and maybe rotating and all of that kind of stuff.

What you want to do is get organized. So get a spreadsheet or a piece of paper or whatever it is, and get all of the information about your debts. Figure out how much you owe, who you owe it to, what the interest rate is, what the balance is. Getting all of that information helps you to make strategic decisions about what you’re going to do with your debt instead of flying by the seat of your pants.

So get all the information about your debt, and then decide how you’re going to tackle it. Are you going to do the debt snowball? Are you going to do the debt avalanche? I’ve had clients where there was a particular debt that really bothered them, and they focused on that one first, even though it didn’t fit either one of those strategies. The one that always stands out to me was one of my clients’ mom had cosigned on one of her loans, and she just didn’t like that that loan was hanging over her mom’s head, so she decided to focus on paying that one off first.

Again, you’re allowed to make those kinds of decisions, but if you don’t have the entire lay of the land, you don’t know what you’re dealing with, how much debt you have, what’s owed where, what the minimum payments are, what the interest rate. Like you can’t make any decisions. So get all the information, figure out what strategy you’re going to use or which debt you want to tackle first, and then again take all of the money that you have that you are not spending, and put that money towards paying off that debt.

That comes back to what we’ve talked about many times before, which is being intentional with your spending, planning your spending, because you can’t spend everything you make and expect to make progress with your finances. That gap between what you make and what you actually spend is the money that you use for goals like paying off your debt.

So when you make that plan and you know how much money you’re putting towards your debt, now you’re gonna choose the one and put that money towards it, and that is how you make consistent progress and end up paying your debts off.

Hopefully that is helpful for you if you are trying to figure out how to tackle multiple debts at once. That is the plan that I used. That is the plan that I recommend. If you’d like help with mapping out your own plan, sign up for a strategy session. Head to Rho thomas.com/apply.

All right. So that is it for this week’s episode. Please take a second and share this episode with a friend or two who you think could use this information. That is how we get this information in the hands of as many lawyers as possible. And as always, I appreciate your support.

As we close out, friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.