3 ways on how NOT to pay off debt

by Tracy Latona |

That sticky, sickly feeling like black tar that clings to you; you want to break free, but there’s so much information and many ideas bombarding you on all sides on how to get rid of your debt. The confusion creates stress and anxiety, and you don’t know where to turn.

What if it didn’t have to be that way?

In this article, we will dig into 3 ways on how NOT to pay off debt, and the method that actually creates the transformative change people long for. Let’s dive in, shall we?

Method One of what NOT to do to pay off debt: Use 0% interest balance transfer credit cards. What they don’t tell you, is that there is a fee to use their credit card, a fee to transfer, and Heaven help you if you don’t pay it all off in the introductory period. This method moves debt around, and actually creates MORE debt. I’ve had clients use this method (before they worked with me) and realize their debt actually grew from transferring, vs. solving the problem head on.

Method Two of what NOT to do to pay off debt: Use your home equity to pay off lump sums of debt. Whether that’s a cash-out loan, a refinance, or a Home Equity Line of Credit (HELOC), using the equity (what your house is worth minus what you owe on the mortgage) is creating a bigger problem. You’re moving debt around, for a much longer period of time; even decades! You put your house on the line. Most people don’t realize that they would need to pay off their mortgage first AND the methods above to be able to move, or receive a penny from the sale of their home. This keeps you in debt longer, is more expensive long term, and puts your house at risk.

Method Three of what NOT to do to pay off debt: Cash out your retirement accounts. If you are younger than 59 1/2, you will have to pay a 10% penalty up front for any money taken out of the account, on top of having to pay income tax on that money. For example, if you take out $20,000 to pay off debt, you will pay $2,000 out of that, AND have $20k added to your income come tax time. Not only that, but you have lost the power of compounding interest. If you were to leave that $20,000 in an account by itself (not even considering the compounding effect of what’s left in the account), at an 8% rate of return over 25 years, you will have lost $146,803 to pay off $20,000 of debt. That’s the definition of short term gain and long term PAIN.

So, what IS the best way to pay off debt for good? There are several, and I prefer the Debt Snowball Method. List all your debts from smallest amount owed to largest amount owed, pay the MINIMUM on all of them except the smallest one. Firehose the smallest one, pay it off, celebrate, and roll everything you were paying on that one to the minimum of the next one. Rinse. Wash. Repeat.

Tracy Latona
Golden Rose Financial Coaching
(502) 665-1127
ramseycoach.com/goldenrosefinancialcoaching