One of the biggest questions when it comes to these large purchases is whether to use debt or cash. Often, these decisions are linked to interest rates. For example, if you’re making 6% on bond investments and the mortgage rate is 5%, debt may be an attractive option. This approach can seem straightforward, but it can be an emotional decision—directly tied to how we view debt. Let me give you an example.
A few years ago, my dad decided to buy a home. His idea of risk was opening his wallet, and he paid for everything in cash. At the time, mortgages were only 4.4% while CDs were paying 6% interest. I told him to put the money in CDs and take out a mortgage; he’d have made more if he did. But he was absolutely against taking on the debt for a house. And that was that.
Like most things in finance, math is only part of the equation. Emotion determines most of our decisions. That said, I believe it’s important to know your financial options. You can be entirely against planning for debt and want to pay in cash—but have a backup plan, just in case.
In this article, I’ll cover some basics about debt, whether to save if you already have it, and different methods people use to become debt-free.
First, let’s consider what counts as debt. Most Americans hold some type of debt, with the total household debt reaching $18.20 trillion in the first quarter of 2025. This number encompasses all types of debt, including:
If you plan to use debt, even if you don’t want to share that with your financial advisor, it’s important to know which kind of debt you plan to use to pay for purchases. This is because not all debt types are created equal.
How does this matter? Let’s consider that you want to buy a house and you plan to get a mortgage. You may want to use a credit card a few months before applying for a mortgage to boost your credit score and increase the likelihood of getting a lower interest rate.
Every financial plan is unique to your specific situation. In cases of high-interest debt, it’s often recommended to spend all excess income towards reducing your debt. That said, there’s often a middle-ground to consider.
For example, if you are still working and have a 401(k), you may choose to invest for a maximum employer match. While it may stress short-term finances, there’s the potential for greater long-term gains from capturing these employer dollars.
In the case of subsidized, low-interest loans, there is a case for paying the minimum and adding the equivalent payment into your savings. However, this is extremely variable and dependent on the total amount. A large mortgage payment, for instance, may be worth paying down early.
At the same time, there are certain priorities that come before debt plans, such as ensuring timely bill payments and building an emergency fund.
There is a delicate balancing act between savings and debt repayment, and whatever path you choose should be aligned with your risk tolerance.
It’s also important to note that you cannot “invest yourself out of debt.” There are many scams out there promising that investments or trading is a quick way to reduce your debt—this is the equivalent of gambling.
Investing and saving components to your financial plan are typically long-term activities and cannot replace spend or debt plans.
Most finance gurus and advisers alike have the same general methods of paying off debt. However, most advisors should take a proactive approach and help you plan for debt, based on your risk tolerance, liquidity, and goals.
Below are 3 ways you may see when looking at debt solutions.
One of the most well-known approaches to getting out of debt is to pay off the smallest of your loans possible. Once that debt is paid, you can take the money you were putting towards that payment to another debt account. The main attraction of this option is momentum: It can be encouraging to keep paying off debt, while reducing the stress of mounting payments.
In contrast, this method focuses on paying the highest interest rate first. Placing all of your energy on the most expensive debt enables you to save on interest in the long-run, even if it can feel slower than the snowball method.
It can be important not only to choose a payment plan for your debt, but to be aware and intentional about your debt. Auto loans, mortgages, and medical debt may be expectations – but it’s easy to rack up unintended purchases. Having a debt model built into your financial plan, with a solid understanding of your spend triggers, can help you stay on track.
The above approaches are just the beginning when it comes to dealing with debt. They provide a general outline, but outside of making monthly payments, offer little strategic insight. Beyond increasing your income and reducing expenses, there are a few strategies available to reduce the debt burden.
However, these specific strategies are not made equal, and some require significant sacrifices. Please consider your debt strategies carefully, and talk with people you trust before taking the riskier courses of action.
In the case of auto loans, student loans, or a mortgage, it can be possible to revise your current credit agreement. You can refinance a loan to provide either a shorter payment plan with lower interest, or a longer plan with lower monthly payments.
It’s common to refinance after an interest rate drop. For example, if you have an auto loan at 7% interest, you may choose to refinance when the average interest rate drops to 4%.
If your primary debt is credit card debt, there is another option than handling credit card interest: Transfer balances.
Some credit card brands allow you to transfer balance from one card to another, with low interest rates or no interest rates for a certain amount of time. This reduces interest buildup and can help you to lower your debt faster.
If you have multiple debt lines, it can be useful to combine them into a single payment. Essentially, you are working with another lender, who puts money into paying your debt, and then you pay that one loan. While it can be helpful if your debt is spread out, rates may end up being higher —forcing you to pay more over the lifetime of the loan than you would for separate debt accounts.
A second-to-last-case scenario when dealing with credit card debt is to settle for a lower amount with your credit card company. You can do this through an agency or on your own, however, it is a stressful process. It includes failing to make payments and negotiating with creditors while ignoring collectors, which can cause additional strain and significantly impact your credit score.
This is often a last-resort option, but it typically is unavailable for medical debt or mortgages. If successful, you will pay less than you would have otherwise.
The last resort for any kind of debt is bankruptcy. Once you file for bankruptcy, you cannot pursue any collection activity, take any legal action, or even communicate with you. This can seem appealing, but it will tank your credit score and make it more challenging to access credit over the next decade.
Debt can be an uncomfortable or challenging topic. But it always helps to have a second opinion, even if you plan to pay for everything in cash.
If you are looking for assistance in your financial plan, consider booking your complimentary session today.
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