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3 Tips To Consider Before Paying Off Debt

Tackling any amount of debt is a significant part of financial planning. Here are three things you should consider before building your repayment strategy.

Articles by Tania Brown, CFP®
By Tania Brown, CFP® Financial Coach, Financially Thriving Mom Published Jan. 04, 2021
Published Jan. 04, 2021
5 min read

There are so many different opinions about debt. Some see debt as a barrier to financial success, and others see debt as the holy grail of financial prosperity.

But not all debt is created equal, nor does it affect everyone in the same way: Black Americans are negatively impacted more by debt, particularly student loan debt, than their white peers. For example, according to Business Insider, “an average black graduate has $7,400 more in student debt than his or her white peer,” and “white borrowers pay down their education debt at a rate of 10% a year, compared with 4% for black borrowers.”

Knowing this and the overall issue of debt in the United States compared to other countries, it’s imperative that Americans, particularly Black Americans, create a plan to tackle this head-on. Ultimately, how you tackle debt should be a personal choice based on your financial goals.

For example, if you’re someone who wants to eliminate debt as quickly as possible, then creating a payment plan around that goal may be your priority. If, on the other hand, your goal is to maintain your current lifestyle, then the focus may be managing debt versus eliminating debt.

Here are three things you should consider before you start paying off your debt:

1. Take note of your spending and create a plan.

A spending plan that accounts for all your required expenses gives you an idea of how much extra money you have to put towards your debt.

Money is finite, so to pay off debt, you will have to prioritize how you spend your money.  If your budget is tight, think about how to spend money only on the things you care about, rather than the things you don’t. Cut costs on the objects and experiences that don’t bring added value to your life.

2. Build your emergency savings.

The second thing you should consider is beefing up your emergency savings to at least 3 months of expenses. This is particularly true now, during a worldwide pandemic, when many Americans have lost their jobs and are struggling to find new opportunities in a crowded and competitive job market.

The New York Times also states that “African-Americans also earn less, are quicker to be laid off, are slower to be rehired and are less likely to be promoted. Historically, the black unemployment rate is twice that of whites.”

Saving even three months of expenses may sound like a lot, but without an emergency savings account, you may be one unexpected expense away from getting into more debt.

When comparing accounts for your emergency savings, consider ones that allow you to move your money as often as you would need and that offer interest to counteract the effects of inflation.

One efficient way to save is by using Betterment’s Cash Reserve account, a high-yield cash account that has unlimited transfers in and out, no fees or transfer amount limits, and FDIC insurance up to $1 million for individual accounts (or $2 million for joint accounts, should you wish to save with a partner)†, once deposited at our program banks.

Save with Cash Reserve

For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance.

3. Choose your debt payoff strategy.

The third step to paying off your debt is to choose a long-term debt payoff strategy that will inspire you to stay-the-course.

However, in the short-term, always ensure that you are making on time, minimum payments to your loans, since it will save you from being charged extra penalties and fees and from negatively affecting your credit score.

Here are four ideas to help inspire you:

  1. Debt avalanche: Pay off debt with the highest interest rate first. Depending on your personal situation, this is often the most recommended strategy since it allows you to save money you would have spent paying off interest. What’s considered a high interest rate can vary, but typically it’s an interest rate higher than 5%.
  2. Life-altering debt: Pay off debt that, if unpaid, can be damaging— things like tax penalties, certain loans, liens, and judgments due to court decisions.
  3. Debt snowball: Pay the smallest balance first. This is best if you’re motivated by quick wins.
  4. Debt that triggers an emotional reaction: Pay off debt that makes you feel negatively every time you see the bill. This is an option for those with financial obligations tied to emotionally charged events, like divorce or the death of a loved one.

It’s important to note that in whatever strategy you choose, rarely is high-interest debt a good thing. Prioritizing debt with the highest interest rate will generally save you more money and allow you to redirect funds to other financial goals faster.

Ultimately, paying off debt requires planning, discipline, and most importantly, patience. Life will still happen while paying off debt. There will be seasons where you may have to pause your accelerated payments and seasons where you can afford to pay more.

The key to all of this is to stay the course, and hopefully you’ll reap the rewards in the future.


This article is intended for educational purposes only.

Betterment Cash Reserve

†Betterment Cash Reserve (“Cash Reserve”) is offered by Betterment LLC. Clients of Betterment LLC participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.

Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity—e.g., individual or joint—at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.

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