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Personal finance

Boost your financial wellness by tackling debt

Dealing with debt can be overwhelming, especially when you want to invest toward other goals. We have some tips to help you get started.
5 minute read
March 06, 2023
Personal finance
Financial wellness
Financial management
Managing debt

Dealing with debt can be overwhelming and make it difficult to meet your financial obligations, stay on track to achieve future goals, and live a financially healthy life. If you know it's good to have a plan in place but you're not sure where to start, we've got you covered.

Organize your finances

To build an effective plan for tackling your debt, begin by reviewing your budget and then organizing your debts.

1. To make sure you're setting aside money to pay off debts, try following the 50/30/20 rule. This widely used budgeting guide can get you back on track, even when your debt feels unmanageable.

50% of your budget should be allocated to necessities like food, housing, utilities, child care, clothing, and minimum loan payments. 30% can be used for purchases like travel, entertainment, technology upgrades, luxury items, and dining out. Devote the remaining 20% to debt repayment and savings.

Want to see how much you're spending each month? Use our budgeting tool to stay on top of your finances. If you need more help getting started, you may want to consider a robo-advisor that offers a debt-planning service.

2. Create a list of all your debts and list their interest rates, balances, and minimum monthly payments.

Then, decide what is considered high- or low-interest debt for your household. Once you do so, you can start thinking about whether you should invest the 20% of your budget you've set aside or put it toward reducing your balances. You can also allocate different portions of your budget to both goals.

Determine your payoff strategy

There are 2 common approaches to paying off debt: avalanche and snowball.


Debt avalanche

This strategy prioritizes paying off your highest-rate debt while making minimum payments on all your other debts.

Once your highest-rate debt is paid off, transfer your payments to your second-highest-rate debt until it's also paid off. Then continue this until you've paid off all your prioritized debts.

This strategy aims to minimize your total interest paid, keeping more money in your pocket in the long term. To get even further ahead, consider taking advantage of onetime windfalls—like tax refunds or work bonuses—and applying those to your debt as well.


Debt snowball

This approach involves paying off the lowest balance first while making minimum payments on your remaining debts. After your lowest balance is paid off, allocate your payments to the next lowest balance. Continue this until all your balances are paid off.

The snowball strategy can be a more manageable starting point than the avalanche method because you get quick wins under your belt by paying off small debts right away.

With both strategies, it's a good idea to find out what your minimum payments are, verify that your budget allows you to consistently pay that minimum, and set up payment reminders. This can spare you from paying higher interest rates and costs in the short run.

Understand your investment options

We believe that you should first prioritize paying off any high-interest debt like credit cards. But for debt that's comparatively low interest, it's a good idea to compare the debt's interest rate against the rate of return you hope to achieve with your investments. If the interest rate is lower than your projected rate of return, consider investing more of your money into your investment portfolio. If it's higher, it might be better to allocate more money toward decreasing your debt.

Robo-advisors can help you with this decision by aggregating your accounts and providing you with a better picture of your portfolio. If you're interested in learning more, Vanguard's robo-advisor is a great place to start.

As you review your budget and choose a strategy, know that it is possible to bring down your debts over time. Most importantly, keep the bigger picture in mind: Reducing your debts increases your financial wellness, improving your overall quality of life.

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