Creating a Debt Reduction Plan

When you’re worried about money and feel your options are limited, debt can feel like a pair of handcuffs. And if it feels like you can’t do what you want to do—which is to pay it all off and get yourself free—there’s the temptation to do nothing. But there are some things that can be helpful when crafting a debt reduction plan that will work for your situation.

Prioritizing Expenses

Before you start prioritizing expenses, it’s important to have a clear understanding of what income is available and how much is being spent. This can be done with pen and paper, or by leveraging an all-in-one app, such as SoFi Relay.

Keeping a roof over their head is a number one priority for most people. Mortgage lenders are not very patient when it comes to getting their money, and failing to make a house payment can leave a big black mark on a person’s credit record. For renters, paying the property owner on time each month may have a positive impact on their credit report.

Making sure a car loan and car insurance are current, especially if that’s the only way to get to work, might be next in order of importance. After that come big debts, such as student loans, but those may be eligible for student loan forgiveness depending on the type of loan and if the qualifications for forgiveness are met. Refinancing student loans into one manageable payment might be worth considering if that would save money with a lower interest rate or a shorter loan term. (For federal student loan borrowers, though, refinancing may not be the best option right now since the CARES Act has offered some relief through September 30, 2021.)

Making a plan to tackle credit card debt is also important. Each month, making the monthly minimum payment is important, otherwise, a person’s credit report can quickly reflect any lack of payment . And to manage the outstanding balances on those credit cards, it may be time to work out a new payment plan to get out from under credit card debt.

Once all that information is accounted for, moving forward with a personal debt reduction plan will make it easier to deal with all those long-term bills and relieve debt-related worry.

There are four popular approaches to knocking down debt. The debt avalanche method is probably best suited to those who are analytical, disciplined, and want to pay off their debt in the most efficient manner based solely on the math.

The debt snowball method takes human behavior into consideration and focuses on maintaining motivation as a person pays off their debt.

The debt fireball method is a hybrid approach that combines aspects of the snowball and avalanche methods.

And a personal loan may be an option for those who have a solid financial history or whose credit score has improved since they first signed up for their high-interest loans and credit cards.

Here’s how each strategy typically works.

Debt Avalanche

This method puts the focus on interest rates rather than the balance that’s owed on each bill.

1. The first step is collecting all debt statements (e.g., credit card, auto loan, student loan) and determining the interest rate being charged on each debt.
2. Making a list of all those bills is next, looking past the total amount owed on each debt. This method puts the debt with the highest interest rate in the spotlight, so that one will be at the top of the list, with the other debts listed in order of interest rate, second highest to lowest.
3. Some things to keep in mind might be any fees, prepayment penalties, or tax strategies that could make one debt more or less expensive than the others. When using a balance transfer credit card to save money on any particular debt, reprioritizing the list once the introductory rate runs out and a higher rate kicks in plays a part in how this method works.
4. Continuing to pay the minimum on each bill—on time, every month—is important. But paying extra (as much as possible) toward the bill at the top of the list will help that debt be paid off as quickly as possible.
5. When the first debt is paid off, moving on to the next debt on the list and starting to pay extra there will start the process over again. Money will be saved as each of those high-interest loans and credit cards are eliminated, which can allow all the bills to be paid off sooner.

Debt Snowball

This approach can be effective in getting a handle on debt by slowly reducing the number of bills there are to deal with each month.

1. This method also starts with collecting debt statements and making a list of those debts, but instead of listing them in order of interest rate, organizing them from the smallest debt to the largest (total amount owed, not monthly payment amount).
2. Continuing to pay the minimum—on time, every month—but paying as much extra as possible toward the smallest debt on the list is key to this method. (If possible, completely paying off the balance on that very first bill might provide some sweet momentum to get started.)
3. As with the debt avalanche method above, paying attention to fees, penalties, and tax strategies may determine which debt gets paid first.
4. Moving on to the next debt on the list, and so on, will keep this method in motion. Keeping track of paid-off debts with a visual tracker might help with motivation.
5. No longer using credit cards that have been paid off is a good way to stay out of debt for the long term. And having a goal to set up an emergency fund to cover unexpected expenses—a medical bill or car repair, for example—to stay on track is a good way to stay ahead of the game.

Debt Fireball

This strategy is a hybrid approach of the snowball and avalanche methods. It separates debt into two categories and can be helpful when blazing through costly “bad debt” quickly.

1. Categorizing all debt as either “good” or “bad.” “Good” debt is generally in the form of things that have potential to increase net worth, such as student loans, business loans, or mortgages, for example. “Bad” debt, on the other hand, is normally considered to be debt incurred for a depreciating asset, like car loans and credit card debt. As this list is being developed, identifying all debt with an interest rate of 7% or higher is likely the “bad” debt that may be beneficial to focus on first.
2. Listing bad debts from smallest to largest based on their outstanding balances will provide the working order.
3. Making the minimum monthly payment on all outstanding debts—on time, every month—then funneling any excess funds to the smallest of the bad debts is the focus of this method.
4. When that balance is paid in full, going on to the next smallest on the bad-debt list will keep the fireball momentum until all the bad debt is repaid.
5. When that’s done, paying off good debt on the normal schedule can be a smart way to invest in the future. Applying everything that was being paid toward the bad debt to a financial goal, such as saving for a house—or paying off a mortgage, starting a business, or saving for retirement, for example, is a good way to look forward to a financially secure future.

Personal Loan

Consolidating debts at a lower interest rate or with a shorter term offers another option to pay those debts off in less time than expected.

1. Gathering debt statements and totaling up the debts to be paid off is the first step.
2. To have an idea of interest rates that might be available (most lenders will offer a range), making sure the information on credit reports is accurate is the next important step. Any errors found on a credit report can be reported to the credit reporting agency.
3. Looking at a variety of lenders to find the best interest rates and terms available will help when setting a goal to find a manageable payment while paying off the debt load as quickly as possible.
4. Considering member benefits or other perks that lenders may offer, such as a hardship deferral or a discount on a future loan might make a difference when choosing a lender. Then, applying for the loan that best suits the borrower’s needs is the next step in the process.
5. Paying off old debts with the personal loan and staying current with the new loan payments will help keep things manageable. Sticking to a budget that prevents the same spending mistakes from being made again is important to keeping debt at bay.

Personal loans used for debt consolidation can help pull everything together for those who find it easier to keep up with just one monthly payment. A bonus is that because the interest rates for personal loans are typically lower than credit card interest rates, the amount paid on the total debt may be less than what would have been paid just by plugging away at those individual debts. For those who qualify for a rate that’s less than their credit card rates, a personal loan can make sense.

The Takeaway

With an unsecured personal loan from SoFi, debts can be consolidated and paid off in a way that works for your income, budget, and timeline.

Whatever payoff method you choose, the point is to do something. Having a debt reduction plan in place is key to getting rid of those financial handcuffs and being able to look forward to a successful financial future. Planning ahead, saving for specific goals, and sticking with a budget will go a long way to minimizing dependence on credit cards or high-interest loans in the future.

Ready to tackle your debt head-on? A personal loan from SoFi can help you consolidate your debt into one easy-to-manage monthly payment.

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This Often-Overlooked Way to Fund Your Roth IRA Has Many Advantages

A Roth IRA is a uniquely powerful retirement savings tool, because you won’t pay taxes on the money you withdraw during retirement. An annuity is a way of generating guaranteed income. Put them together, and you have a powerful retirement protection tool that can provide guaranteed income for life, with a big plus: It’s completely tax-free.

Anyone may roll over part or all of an existing Roth to a Roth annuity.  You may transfer all or part of the funds in an ordinary Roth to a Roth annuity. While there are income and contribution limits for new money going into a Roth IRA, they don’t apply to rollovers — including rollovers to a Roth annuity.

Different types of annuities accomplish different things and have distinct pros and cons — like the Swiss army knife of personal finance. Since they’re so varied, one type or another can work well for a Roth IRA.  Investment choices, fees and contract provisions vary, so work with an annuity agent who will educate you about your choices and clearly lay out the pros and cons.

What kind of annuity works for a Roth? It depends on which stage of your financial life you’re in. In the accumulation stage, you’re building wealth for retirement. In your decumulation stage, you’re retired and receiving income from your savings.

Here’s how Roth annuities can work in each stage.

Building wealth for those approaching retirement

One attractive option is a fixed indexed annuity. With the stock market continuing to break records, it may be vulnerable to a major long-term downturn. When you’re young, you can ride out the ups and downs. But if you’re in your 50s or 60s, you may want to get growth potential without taking the risk of losing Roth money you’ll need during retirement. If so, an indexed annuity might be a good choice for you.

It pays interest based on an underlying market index, such as the S&P 500 or the Dow Jones Industrial Average. While the interest earnings are locked in, up to a stated cap (you may not get all of the upside) each year, you’ll never lose money when the index declines.

While indexed annuities are linked to one or more underlying market indexes, their value does not vary from day to day. Instead, they pay a varying amount of interest that is credited and locked in each year on the anniversary date of the contract. Since equity markets can be volatile, indexed annuities are designed to be held long-term, whether yoked to a Roth IRA or not.

A fixed-rate annuity — also called a multi-year guarantee annuity, or MYGA — is a more conservative choice. It works like a bank CD, paying a set interest rate for a set period. Fixed-rate annuities these days pay much more than CDs of the same term. As of April 2021, you can earn up to 2.90% a year on a five-year fixed-rate annuity and up to 2.25% on a three-year contract, according to AnnuityAdvantage’s online rate database. The top rate for a five-year CD is 1.25% and 1.05% for a three-year CD, according to Bankrate. 

Fixed-rate annuities can play a key role in asset allocation. Let’s say you decide to split your Roth assets up 50-50 between equities and fixed income. A fixed-rate annuity can give you a much higher rate of interest than you’d get today with safe fixed-income alternatives, such as CDs and Treasury bonds.

For current annuity rates, see this online annuity database. Interest is paid and compounded annually.

How to get tax-free lifetime income during retirement

Other than a traditional employer pension or Social Security, an income annuity is about the only vehicle that can guarantee an income for as long as you live. And by combining an income annuity with a Roth, that income is tax-free.

If you need income from your Roth very soon, consider an immediate income annuity. You can open a Roth annuity with a single payment (such as a tax-free rollover from an existing Roth IRA) to an insurance company. The insurer in turn guarantees you a stream of income. You can choose how long the payments will last — for instance, 15 years. Most people, however, choose lifetime payments as “longevity insurance.”

You can receive your first monthly income payment a month after your annuity contract is issued.

If you’re married, consider the joint-income option. With it, your spouse will receive regular monthly income payments for the remainder of his or her life too. Payments to a surviving spouse are always tax-free.

If you don’t need income right now, consider a deferred income annuity. Here, your income stream will begin at a future date you choose. By deferring payments, you let the insurer credit more interest over the years on your behalf, and you’ll ultimately get more monthly income. For instance, by delaying lifetime annuity payments from age 65 to 75, you’ll get about 85% to 90% more each month. On the other hand, you and/or your spouse won’t receive the deferred payments as long.

Another option is an indexed annuity with an income rider. The rider guarantees a certain income regardless of the performance of the annuity. It provides income like a deferred income annuity, plus the potential upside of an indexed annuity. It’s sometimes called a “hybrid” annuity.

The downside is cost. The rider typically costs about 1% of the annuity value annually. The insurer deducts this amount from your policy.

The advantage is retaining your money. Unlike an income annuity, which typically has no cash surrender value, an indexed annuity with an income rider lets you keep your money while guaranteeing lifetime income, starting on a date you choose.  You thus have flexibility. If you need the money, it will be there for you to withdraw or annuitize. (Wait until the surrender period is over to avoid any penalties.)  If you don’t need the money, you can pass on any remaining value to your heirs.

Is the extra cost worth it?  It all depends on your situation and goals and your desire to leave money to your heirs.

Whether you’re saving for future retirement or are currently retired or soon will be, annuities offer a range of often-overlooked strategies for the Roth IRA and amplify its advantage of tax-free retirement income.

A free quote comparison service with interest rates from dozens of insurers is available at or by calling (800) 239-0356.

CEO / Founder, AnnuityAdvantage

Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities.


Early Retirement (What to Consider & How to Retire Early)

In between meetings with coworkers, busy periods full of impending deadlines, and a seemingly never-ending list of tasks, some American workers might daydream about the possibility of leaving it all behind for early retirement. While this option isn’t feasible for all workers, retiring early can open a world of possibilities. Early retirees can get a head start on their travel bucket list or even switch career paths. Or, some may just want to spend more time with family. 

With that said, retiring early isn’t the right choice for everyone. Early retirement requires budgeting early on in life, aggressive savings, and a firm plan for the future – with the flexibility to absorb the unexpected built in. If you’re interested in learning how you can retire early, it’s important to get a comprehensive understanding of what it involves. Keep reading for a full explanation or jump to a section that answers your question directly.

Why Do Some People Retire Early?

Some of the biggest proponents of early retirement are followers of the FIRE Movement. FIRE stands for Financial Independence, Retire Early, and it’s based on a financial plan defined by an intense savings program that allows for individuals to retire much earlier than 65. Up to 70% of all income during their working years goes into savings. When FIRE followers leave the workforce, they plan to live off small withdrawals from their portfolio until they hit the age of 65.

FIRE does have some serious drawbacks to consider. Saving 70% of your annual income can mean you trade an early retirement for a potentially poorer quality of life during the prime of your life. In addition, if the stock market drops or another unexpected event occurs causing a drop in interest rates, those depending on the FIRE plan may have to turn to “Plan B” to get by. 

If the traditional FIRE plan seems too extreme, there are more measured approaches to saving for retirement you may want to consider as well. Most of these plans involve putting above-average contributions into retirement accounts, more minimalistic living, and the addition of part-time work with early retirement.

Benefits of Retiring Early

Retiring early offers a range of benefits that can increase your quality of life and allow:

  • More time with loved ones: One of the biggest reasons why people are attracted to retiring early is that it allows people to spend more time with family and friends. 
  • Ability to travel: The earlier you retire, the less likely you’ll be dealing with age-related health issues – which may impact your dreams of world travel. 
  • Better health: If stress and other health issues related to your job plague your body and mind, retiring early could help restore your health. Retirement means you can sleep later, prioritize exercise, eat three square meals a day, and incorporate other healthy habits that might have fallen by the wayside during your years in a work environment.
  • Make a different career move: Retiring early also gives you the opportunity to start a new career. Perhaps you want to switch fields, start a new business, or pursue your idea of monetizing a hobby.

Should I Consider Retiring Early?

For many, retiring early is a possibility, but only if you plan early and take a conservative approach. It’s also important to avoid painting an overly rosy view of retiring early; it can be a difficult dream to manifest.

One common way Americans retire early is if their company gives out early retirement offers. COVID-19, in particular, has caused many companies to deliver retirement offers to senior employees in an effort to save money.

But before you decide that retiring early is the right choice, it’s critical to consider the disadvantages as well.

Disadvantages of Retiring Early

  • Health impacts: Just as retiring could help boost your health, it could also lead to mental declines. Leaving the workforce suddenly can be a difficult lifestyle transition and impact you in ways you weren’t anticipating. In fact, the National Bureau of Economic Research reported that retirement can lead to poor health outcomes. However, that same report also found that retirees who kept up their social activity and exercise were less likely to experience these issues.
  • Decreased or smaller Social Security benefits: The earlier you start using your Social Security benefits, the less time your benefits have time to grow. In fact, if you start taking your SS benefits at the earliest age of 62, your monthly payments will be 30% less than if you had waited until 67. 67 is what the Social Security Administration considers your “full retirement age.” You can calculate the impact of retiring earlier or later by using the calculator on the website.
  • Savings stretch: Retiring early sounds great in theory, but if you retire at age 60 and live until 100, your savings would need to last at least 40 years. When you work longer, you have more time to contribute to a 401 (k) and allow your money to compound.
  • No health insurance coverage: You’ll need to find health insurance on your own until you can get Medicare at age 65. It’s important to note that buying individual health coverage as an older adult is typically very expensive. 
  • Can impact other savings goals: If you have kids, you might be saving for retirement and college. Or, perhaps you’re also saving for a home. Aggressively saving for retirement might not be realistic when other savings goals are more pressing.

How Can I Retire Early?

If you decide to retire early after weighing the pros and cons, it’s important to spend adequate time actually planning for it. 

Start by reading tips from investors who retire early and other workers who made their retirement happen years earlier than expected. Although anecdotes shouldn’t form the basis of your early retirement preparation, reading the accounts of like-minded individuals can help you anticipate potential problems you may encounter. These stories might also expand your understanding of what it’s really like to retire early – and give you some insight into whether you’re equipped to handle those realities. 

Besides gathering knowledge and doing your due diligence, it’s also important to sit down and crunch the numbers to see if becoming a younger retiree is possible. Here are a few steps you should take to build a basic framework for your early retirement:

    1. Calculate your annual retirement spending. To do this, look at your current monthly spending and take into account what expenses might increase or decrease. Add your monthly expenses and multiply that number by 12. Ideally, you’ll increase it by 10% to 20% to work in wiggle room for unexpected expenses or splurges. 
    2. Estimate your total savings needs. A common rule of thumb is aiming to save 25 times your planned annual spending saved before you retire. Your exact number may be more or less depending on your lifestyle and other relevant variables.
    3. Invest. It’s also important to invest in a retirement portfolio set up for long-term growth. Make sure that you’re contributing enough to your retirement accounts in the context of your retirement horizon. Retiring early means you have less time to let your retirement investments grow.
    4. Focus on paying down debt. Get out of debt so you can focus on saving. Money that isn’t going to pay your debts could be growing in a retirement account.
    5. Stick to your budget. And finally, it’s important to stay on track with your budget so you can actually achieve your retirement goal. Consider evaluating your savings and investments each month to make sure you’re on the right path. 

Considerations to Factor into Planning

Besides doing the math to help you reach your retirement goals, it’s also important to know exactly what kind of retirement you want. Are you planning on retiring in your hometown? Are you aiming to move to a tropical destination? Or, do you want to relocate somewhere with a cheaper cost of living? You’ll need to factor in those kinds of living costs and lifestyle choices into your overarching plan. 

Takeaways: Early retirement and planning for the future

Early retirement isn’t right for everyone. At the end of the day, retiring early can involve more risk than traditional retirement. You might have to tap into your Social Security and, in turn, lower your monthly payment potential. A downturn in the market can mean your portfolio returns aren’t as high as you expected. If you do decide to plan for early retirement, it’s important to build in flexibility and consider a middle-road approach. Perhaps you can consider keeping a side job to tide you over until you qualify for Medicare, for example. With these tips, you can plan a happy, successful retirement with peace-of-mind.

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