I started learning about debt payoff methods when I started getting serious about my own debt. I had just moved for maybe the fifth time in as many years, and was feeling a strain on my credit.
Not only was I not employed full-time, but I also wasn’t employed in my field of choice. I was stuck working part-time at Target and was hating every minute of it. Nothing against Target, it’s a great corporation for all intents and purposes, but it was not my final job destination I was wanting for myself after about 5-6 years of college and 3 degrees.
After I found stable employment, I knew I needed to start thinking of a plan to pay off my debt. It wasn’t going to be able to be my first priority but it needed to be one of my main priorities over the next few years.
That’s when I found Suze Orman’s Debt Avalanche Method and her budget method from her book, Suze Orman's Financial Guidebook. Orman’s Debt Avalanche Method allowed me to focus on the interest rates to further my personal finance goals with my mountain of debt, compared to Dave Ramsey’s Baby Steps and Budget.
Suze Orman started focusing on the personal financial sector in the late-80s. She’s solidified her financial success by starting her own company, publishing nine personal finance books (including Suze Orman's Financial Guidebook) over a 20-year span, and various TV and multimedia ventures.
She’s known for creating the Debt Avalanche Method, a debt pay off method focused on interest rates rather than overall amounts. Orman’s Avalanche Method could be for you if you rely heavily on math in your decision-making process. You might have to be a bit stronger-willed to pull this method off as well, but relying on math seems to be a bigger factor in carrying this method out.
Debt Avalanche Method
Suze Orman’s debt payoff method relies heavily on loans’ and credit cards’ interest rates. The basis for the debt pay off method is to avoid paying more in interest.
While it’s important to pay off credit cards and loans, Orman’s theory is that you will save more money by avoiding interest build-up if you pay off higher interest rates first.
Categorize Credit Cards by Interest rate
The first step to Suze Orman’s Debt Avalanche Method is to determine each of your credit card’s interest rate. This step has no impact on what your debt is on each credit card. Even if you have various amounts, the main point is to determine each credit card’s interest rate and rank them from highest to lowest.
While it’s important to acknowledge and work on other types of debt, such as auto, student, and mortgage loans, focus on credit, personal, and auto loans first. These are considered ‘bad’ debt. Mortgages and student loans are considered ‘good’ debt but are usually higher in amounts.
Tally up each credit card’s and loan’s debt
After determining your credit card’s and loan’s interest rates, it is important to determine how much debt you have overall.
Each card and loan has a minimum payment. While making minimum payments will not make an incredible impact, determining each minimum payment and any extra amounts you can contribute to your payment.
Each total does not determine the order you will pay off the debt. While it’s important to know how much money you will be paying back, but it will not influence your priority in paying the off.
Start with the highest interest rate card
You will start with the highest interest rate card. The amount on the card or loan does not matter so much as striving to pay off interest rate contributions to the card compared to the principal amount.
Determine how much you can additionally contribute to your first payment. Even a small contribution can make a big difference. An extra $20-50 can shave off a few payments every year.
Once you pay off the first card or loan, add the minimum payment from the first card or loan and add it to the second minimum payment. Continue to do this for each credit card and loan. So when you make it to the fifth category, you would combine options 1-4 minimum payments with the fifth minimum payment.
Rather than focus on percentages of your budget on a particular point, Suze Orman tells you what you should be concerned about depending on where you are in your life. Whether you’re starting out in your 20s or about to retire in your 60s, Orman details what you should be focusing on and what you should avoid at all costs.
Otherwise, Orman focuses on saving in small amounts rather than a set amount. Each point focuses on ways to save for each part of your life and creating a debt-free retirement.
Orman’s debt and budget tips
Orman’s debt and budget tips in Suze Orman's Financial Guidebook are vaguer compared to Ramsey’s Baby Steps financial plan but still provide a guideline on how to achieve financial freedom. This is how Suze Orman's Financial Guidebook prioritizes her financial plan:
Suze Orman’s debt and budget tips: Savings
Do you really need to settle down in a house? If you plan to move or need to take out a 30-year mortgage for lower rates, you might consider renting for a bit longer. You are more likely to save a bit more and contribute your money elsewhere during the meantime.
If you’ve had kids during this time, you might have also considered putting aside some money for their education. If you don’t have your retirement in order, Orman suggests in Suze Orman's Financial Guidebook that you put retirement first rather than set aside your money for your children’s education. Again, the interest compounding on your retirement is likely higher than a savings account for your children’s education.
Suze Orman's Financial Guidebook suggests you save a little at a time. She isn’t as set on having a set amount compared to Ramsey’s $1,000 emergency fund straight-off the bat. She does suggest about 8-12 months worth of savings but she is more incremental than having a set process in achieving that amount.
Suze Orman’s debt and budget tips: Retirement
Suze Orman's Financial Guidebook suggests you heavily focus on starting to save for retirement in your 20s. Take advantage of matching opportunities with your employer and maxing out your investment contributions.
By contributing more in your 20s to your retirement account, you allow your money to compound or multiply for the longest amount of time. You might not contribute as much later in your career, but your earlier contributions are still multiplying their rates while you continue to add money on your initial investments.
You should also consider various types of compounding accounts, such as a Roth IRA, a 401K, etc. You should consider other investments, like the stock market at a later time, but focus on your retirement options first.
Suze Orman’s debt and budget tips: Education Savings, Debt, Mortgage
Suze Orman's Financial Guidebook suggests you should be making regular consistent saving contributions at this point. You might also consider putting some additional money into the stock market but you don’t have to contribute too much at this point.
If you don’t have children, consider paying more on your mortgage payments. It should be a goal to pay off your mortgage early if you are capable of doing so. Make a goal to pay 1 extra mortgage payment each year.
That being said, Suze Orman's Financial Guidebook suggests to avoid relying on credit and equity. You want to be paying for your own needs and wants with your money, not with borrowed money.
Suze Orman’s debt and budget tips: Retirement, Health Insurance
Health insurance is a major point of contingency once you start reaching retirement and after you leave the workforce. It’s important to have a health insurance provider after you leave your occupation whether that’s with Medicare or Medicaid or with another provider.
While you might have the option to retire early, Suze Orman's Financial Guidebook suggests holding off on this as long as possible. Being involved in your job for as long as possible allows you the chance to have an income rather than relying on your savings for a longer amount of time.
If you haven’t paid off your mortgage, try to avoid going with a reverse mortgage or anything that would hinder your progress in paying it off. If your retirement and social security benefits don’t allow you to comfortably pay your minimum payments, you might consider moving to a smaller place that meets your needs.
Make sure to clarify and instigate wills, trusts, and power of attorney for your finances at this point.
Think Suze Orman's Financial Guidebook approach to debt pay off and budget tips are right for you? Let me know how her methods have helped you achieve financial freedom in the comments below.
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