The Debt Strategy: What to Tackle First and What to Keep - S2E4

A good debt strategy can be the key to not just ending financial anxiety, but improving actual financial results. You can know exactly how much debt you have and still be unsure what to do with it. 

Should you pay off the smallest balance first? Focus on the highest interest rate? Keep low-interest debt while using your money elsewhere? Or address the debt that creates the greatest vulnerability in your life?

In this episode, we move beyond the idea that all debt is automatically bad or should be eliminated as quickly as possible. You’ll learn how to evaluate each debt according to its urgency, cost, required payment, usefulness, and the risk involved in continuing to carry it.

You’ll also update the debt portion of your financial snapshot and use two skills from earlier episodes, the Reset from ep. 2 and Focusing from ep. 8, to stay present when a particular account brings up fear, shame, or avoidance.

By the end, you’ll have a clearer way to distinguish between:

• Debt that requires immediate action
• High-interest debt that may be worth accelerating
• Debt that may be reasonable to maintain
• Debt that feels emotionally urgent but may not be financially first

This episode is educational and is not individualized financial advice.

Chapters

01:05 How to decide what to do with debt
01:50 When low-interest debt may help you get ahead
06:52 Updating your debt inventory and financial snapshot
07:20 Using the nervous system Reset before reviewing debt
10:13 Focusing through debt anxiety, shame, and avoidance
13:18 Debt triage: past-due accounts and immediate risks
14:28 High-interest debt and the true cost of borrowing
15:31 Good debt, strategic debt, and financial vulnerability
19:11 Debt avalanche versus debt snowball

Next time, we’ll look more closely at how to balance faster debt repayment with building financial resiliency, so one unexpected expense doesn’t send you back into debt.

The Rhythm of Money: Living Your True Note 

https://TheRhythmofMoney.com

No financial advice is offered or implied. For guidance specific to your situation, consult a licensed financial professional. 

Transcript

SPEAKER_00 0:03

You can know exactly how much debt you have and still have no idea what to do next. Do you keep low interest debt because your money may do more for you elsewhere? Do you pay off the smallest balance first so you can finally cross something off the list? Do you go after the highest interest rate, even if that balance feels like it will take forever? Do you focus on the debt that worries you most? Or could that be completely different from the one that actually needs your attention first? That's where we're going today. Because knowing what you owe is one kind of clarity. Making meaning out of what you owe is another. Welcome back to the rhythm of money. In episode 10 of season one, you created the broader financial picture. You looked at what you owned, what you owed, what was coming in, what was going out. Today we're taking the debt portion of that picture and going one level deeper. We're going to add the details that affect your decisions and begin separating several things that can easily get confused. The debt that feels most alarming, the debt that's costing you the most, the debt that's carrying the greatest immediate consequence, and the debt that may not make financial sense to rush to eliminate at all. Because not every balance is automatically a problem. A low-interest mortgage, business loan, student loan, or other manageable debt may allow you to keep money available for emergencies, invest for the future, or use your resources in ways that serve you better than sending every available dollar to a lender. In some circumstances, the money you keep may generate more profits than the debt costs in interest payments. But the arithmetic is only one part of the decision. Carrying debt also creates a required payment. It can reduce your flexibility, it can make you more vulnerable if your income falls, if your expenses rise, or an investment doesn't perform as expected. And the comparison itself isn't always as simple as it first appears. A return you expect to earn from investing is not guaranteed, but the interest you avoid by paying down debt generally is. Interest earned on savings or investments may also be taxable, while some kinds of debt may receive favorable tax treatment. So the real question isn't simply, is debt good or bad? It's this. What is this debt allowing you to do? What is it costing you? And what vulnerability comes with continuing to carry it? Those questions may point in the same direction, but they may not. And as you work through this, I want you to use the skills we've already been building, right? So that would be the reset from episode two, when you notice yourself moving into alarm or your mind either getting kind of scattered or freezing. And focusing from episode five, which we deepened in episode eight, when a particular balance carries more emotional weight than the others, and you know it needs some real attention. Because this isn't only about creating a better spreadsheet, it's also about creating a stronger relationship with your body and its somatic wisdom around financial success. Its practice is staying present with financial information long enough to understand what it's actually telling you. Now, last time we looked at spending as a map rather than a verdict. We explored what certain choices may have been trying to satisfy, confirm, or release. Debt is part of that same map, but it adds another layer. It shows us which past decisions are still making a claim on the money available to you today. And once you can see those claims individually rather than experiencing debt as one large emotional category, you can begin answering the real questions. Which debts deserve more of your attention? Which ones require action now? Which ones are expensive enough that paying them faster makes sense? And which ones may be reasonable to continue carrying while your money serves another purpose. Now I think back to one of the women I did financial projections for. She knew approximately how much she owed, she had seen the balances, but she had never really separated them or looked at what each debt represented. She just told me, almost under her breath, that there was a lot of debt. And she was ashamed right out of the gates. When we went through it together, most of it traced back to one kind of difficult stretch in her life. Her mother had become seriously ill, there was no long-term care coverage, and the cost of care went far beyond what insurance paid. She put part of it on credit cards because the immediate alternative was allowing her mother to go without care. Some came from a business she had tried to build years earlier. A small portion came from spending she wished she had kind of handled differently. Now, she had compressed all of that into one sentence. I have a lot of debt. But that sentence left out almost the entire story. Some of her decisions were acts of care. Some were business risks that carried upside potential. And some were choices she would not make again. And the debts themselves weren't all behaving the same way. They had different interest rates, different payments, different consequences, different emotional meanings, and lessons to teach. They had all become mixed together until the total felt like a single judgment on her life. Once we separated them and looked at what each one actually was, the shame began to loosen. The balances hadn't changed, but her relationship to that information had. The debts were finite. Each one had a balance, a rate, a payment, and a set of terms. The meaning she had attached to them had no such boundaries. It could expand until it seemed to describe everything about her. That's why, for you, we're going to separate the financial information from the story attached to it without pretending that story doesn't exist. So start by pulling out the debt snapshot you made in episode 10. If you're new to the show or you just didn't complete that exercise, you can create this part of it now. So a notebook page will do, or a spreadsheet tab if you'd like things like Google Drive or Excel. Anything like that is enough. We just need some columns. Now before you open any of your accounts or look at a statement, I want you to use the reset if you're feeling any hesitation about this. Okay. So we've got both feet on the floor, if that's available right now, noticing whatever is supporting you, whether it's the chair, the floor. Take one breath and let it have a slightly longer exhale than the inhale. And then just a two-second body scan from the tips of your toes up to the top of your head. Noticing the feeling of your body. Now you're not trying to make yourself perfectly relaxed before you begin. You're giving your nervous system enough present-time information that it doesn't have to treat an account app like an emergency. So now for each step, write down four essential pieces of information. So four columns. First column is who you owe, right? The account or the creditor name. Next column is whatever the current balance is. What is the total? Third column the interest rate. Fourth column, the minimum required payment each month. Now you can also add another column that's going to be just for notes, but those are the pieces of information we need, and the rest are going to be decisions. Now you can use that last column to record anything else that may affect the decision. Whether the interest rate is fixed or variable, whether the debt is secured by a house or car, whether an account is passed due, or whether a promotional interest rate is about to expire. Right? So what we're gonna put in to these columns are gonna be your credit cards, any medical plan payments, student loans, including any loan that you may have co-signed for someone else, a car loan, mortgage, home equity line, personal loans, business debt, money you borrow from family, even when no one is quite calling it a loan out loud. Any buy now, pay later sort of stuff, the Klarners and all that stuff. Balances that are still active of any kind. Anything you're expected to repay belongs on the page. And use the latest statement or the accounts online app rather than relying on your memory. Memory tends to round or omit or soften or catastrophize. Okay, we want the actual information. So record or update one account. Then pause. Notice what happened as you looked at it. Did your shoulders rise? Did your jaw tighten? Did your breathing change? Did you suddenly feel the urge to check your email or go get something to eat? Or start cleaning the house? Or decide that this would be easier tomorrow. That moment is useful. It shows you where the exercise may have become emotionally charged to the point of overwhelm or freeze, flight, or fight. If it did, this is where focusing comes in. Let your attention toward the place in your body that reacted most clearly kind of settle. You don't need to analyze it, just notice where it is in the body and what it feels like. The colors, shapes, felt qualities. If this is new to you, go back to episode 8 to really learn it. It's a powerful tool, probably the most powerful I learned in my entire master's in counseling psychology program, and the one that I've continued to use over the decades. But if you did learn it then, you know, we're just using it now, and so you're gonna move through the process until you can stay embodied while asking, what does this reaction want me to know? And get a clear answer. And you may hear something simple like, I'm afraid the balance hasn't gone down any. Or I don't know how I'll ever finish paying this. Or I don't want anyone else to know. Or I should have handled this differently. Or this reminds me of a time I don't want to revisit. Whatever comes, just let that be information. Then make one important distinction. The feeling is telling you what this debt has come to mean inside you. The statement is telling you what you owe and under what terms. Those things are related, but they are not the same thing. You don't have to argue with the feeling or persuade yourself that it shouldn't be there. You also don't have to let it fill in the rest of the spreadsheet. Take another breath. Feel the support underneath you again and your full body. Just a few seconds. Then update the next account. That's how the reset and focusing work together here when we're doing things that may be emotionally difficult to do, but that are important to do. The reset brings you back into your body and into the present moment. Focusing lets any overwhelming reaction become distinct enough that it doesn't have control over the exercise from the background. Then you return to the financial information. You may repeat that cycle several times. This isn't a sign that you're doing badly. It's just part of the task getting accomplished. Once your information is updated or recorded for the first time, we're going to look at the debts through three separate lenses. The first is urgency. The second is cost. The third is vulnerability and usefulness. So kind of a dual third. So let's begin with urgency. Is anything past due? Is a home or car at risk? Is an account in collections or moving toward legal action? Or on a less heavy note, is a promotional interest rate about to end and suddenly start costing you either high interest or back interest? Has a variable rate risen enough that the payment is becoming difficult to manage? A debt with an immediate consequence may require attention before the mathematically most expensive balance does. That isn't poor strategy. It's responding to what could cause the greatest disruption now. So mark those accounts with the word urgent in that notes column. The next lens is cost. Look at the interest rate on each remaining debt. A high rate means more of each payment is going toward the cost of borrowing rather than reducing what you owe. Paying down a high interest debt can be thought of as earning a return equal to the interest you no longer have to pay. A 20% interest rate that's eliminated is a 20% return. And with no taxes owed on that. Beyond even that, if you eliminate a credit card balance that's charging a high rate, that avoided interest is not merely a delicious investment gain. It's also a cost that stops accumulating if you were only doing minimum payments. Now that doesn't mean the highest rate debt is always first. Urgent consequences may come before it, and other parts of your situation may matter. But it tells you which balances are quietly consuming the most money. Mark those debts as expensive. And now we come to the third lens. Vulnerability and usefulness. This is the part that gets lost when every discussion about debt assumes the goal is to simply become debt-free as quickly as possible. Some debt may be helping you use your money more effectively. Suppose you have a low fixed-rate mortgage, and the payment is easily supported by your income. You have adequate emergency savings, and the money you could use to pay down the mortgage is instead being invested for a goal many years out. Paying down the mortgage faster may give you emotional comfort, but keeping it may give you more liquidity, better options, and greater long-term growth potential. Neither decision is automatically right, and it's worth considering just letting it ride. Now let's change the circumstances on that. Suppose the rate is still low, but your income has become unpredictable. The required payment takes up a large portion of what comes in each month, and you have very little set aside. The debt may still look inexpensive when you compare it on interest rates, but it may create significant vulnerability to keep carrying it because the payment continues whether your income arrives or not. It might be worth prioritizing eliminating that vulnerability sooner rather than later instead of trying to make the most out of every dollar of potential profit. Or suppose the debt funded an asset or a business that produces income. The loan may be costing you money, but it may also be supporting something that earns more than it costs. Again, the interest rate alone doesn't answer the question. For each debt that isn't urgent or especially expensive, ask, is the payment comfortably supported by my dependable income? Is the interest rate fixed or could it rise? What am I doing with the money I would otherwise use to pay this down? Is that alternative return reasonably predictable? Or am I comparing a certain debt cost with an uncertain investment return? Would paying off this debt leave me with too little available cash? Would continuing to carry it leave me exposed if something changed? And what am I receiving in exchange for carrying this debt? This is why I don't find the phrase good debt very useful as a permanent label. A debt that is advantageous for one person may be destabilizing for another. A low rate doesn't make the monthly obligation disappear. A high potential investment return doesn't make the investment certain. And being able to pay off a loan doesn't necessarily mean doing so is the best use of your available money. A more useful category is reasonable to maintain under my current circumstances. You might mark those debts in the notes column as maintain. That doesn't mean ignore them. It means you've decided that accelerated repayment may not be the highest use of your money right now. You'll want to check this periodically to see if that's still true. Only after you've separated urgent debts, expensive debts, and debts that may be reasonable to maintain, does it make sense to ask which payoff method to use? Because avalanche and snowball are not methods for deciding whether every debt should be accelerated. They're methods for deciding the order in which you pay debts you have already chosen to accelerate. So, moving into that, the avalanche method directs extra money toward the highest interest debt while you continue making required payments on the others. Mathematically, this will usually reduce the total interest you pay. It's the dollars and cents approach. The snowball method directs extra money towards the smallest balance first. Once that balance is gone, its payment rolls into the next one. The early wins help some people stay engaged because the list begins to get shorter more quickly. It's the emotional intelligence one for a lot of people, but not everyone. You have to do what's right for you and know yourself. Neither method is universally better. If seeing a balance disappear gives you the energy to continue, the snowball method may serve you better than a mathematically perfect strategy that you abandon, right? If you can stay with the process without needing a quick payoff, the avalanche may serve you better in terms of just more money. Some women choose a hybrid. They eliminate one smaller balance to create momentum or free up a monthly payment, and then they direct that extra money toward the highest interest debt and go from there with avalanche. There can also be times when cash flow matters more than either method. A debt with a relatively small remaining balance and just a few more payments that you have to do, but large required payments each month, that may be worth clearing because doing so releases meaningful room in your monthly budget sooner. The point isn't to choose the method with the most impressive name, it's to choose an approach that works with the financial facts and with the woman who has to follow it, you. But don't try to build the entire payoff plan while you're still updating this information. That turns one manageable task of just collecting info and putting it into columns into a series of decisions, and it makes the whole thing seem just easier to just completely avoid. So for today, the exercise has just these two stages. Stage one, update or create the list. Stage two, mark what you find. So maintain or you know. I gave you them. Urgent, expensive, or reasonable to maintain. Then add one more mark for any debt that feels emotionally loaded, even if it doesn't fall into the first two categories. You're not committing to a payoff strategy today. You're learning to distinguish urgency, financial costs, practical vulnerability, usefulness, and emotional intensity. Those things may point to the same account, but they may not. The debt that deserves additional attention emerges after you consider several things together: immediate consequences, ongoing costs, the burden of the required payment, what the borrowed money is allowing you to do, what other purpose your available money could serve, and your ability to follow through on the decision. A few things may happen while you're completing the exercise. You may discover that a balance is higher than you expected. You may notice that a rate has changed. You may have trouble finding one of the details. None of that means you failed at the exercise. It's the reason the exercise exists. If you can't find any item, write unknown temporarily, and then just complete the rest and return to it later. Don't let one missing interest rate stop the entire inventory. You may also feel an urge to start moving money immediately, making an extra payment, closing an account, or changing an investment, because action feels better than exposure. Unless something is genuinely urgent, finish the complete picture first. A complete current view is more valuable than a burst of activity directed at the first account that makes you uncomfortable. If the reaction becomes too strong to continue or you simply don't have as much time as it's winding up taking, use a deliberate stopping point. Write down the next account that you will update and when you will return to do it. Then do one reset before you leave. Pause, breath, body scan. You might say to yourself, I've updated three accounts or four or five. The next one is that medical payment plan. I'll return tomorrow after breakfast and complete that line. That's a legitimate session, right? But keep returning until the list is full and complete and current because incomplete information still leaves room for assumptions to take over. When the full list is in front of you, we calculate the current total. You may already know approximately what it is. I mean, this isn't about creating some dramatic reveal. It's about replacing an old estimate with information you can trust. The amount may be lower than it was back in season one when you first completed this. It may be higher. It may be pretty much the same. You may feel relief, disappointment, frustration, nothing much at all. Once you've done this, you can then say something accurate. This is the amount I owe today. These debts are not all the same. I now have the information required to decide what each one needs from me. That isn't positive thinking, it's fact. The woman I told you about earlier did not become more capable after we separated her debts. She was already capable. The information allowed her capability to reach her actual decisions. That's what you're doing here. You're giving your judgment, experience, and resourcefulness something real to work with. Facts. And once you've done that, another question appears almost immediately. Should every extra dollar go towards the debts you've already decided to accelerate? Or should you continue building savings while balances remain? Sending everything to debt can feel efficient, but leaving yourself with no reserve may send the next unexpected expense straight back onto the credit card. Or worse. Continuing to build savings while very expensive debt compounds also carries a cost. And keeping a low interest debt while saving or investing may make sense under one set of circumstances and create too much exposure under another. The answer depends on things we've already explored, as well as the savings you already have, what your life needs protection from right now, and what kinds of protection are reasonably available to you. That's where we're going in next week's episode. Before we close, I want to ask something of you that isn't really about today's episode. This isn't a show for women who have a problem with money. It's for women who have a relationship with money. And that's every one of us, whether that relationship feels steady right now or complicated. So if there's a woman in your life who's never heard of this show, any woman, tell her it exists. You don't need a reason. You don't need to have noticed anything about her finances. Just let her know there's a way to work with money that starts in the body and not only in a spreadsheet. And let her decide for herself what she wants to do with that information. Share the show with her. Next time, we'll answer the question left open today how to build resilience into how you pay down debt. So the plan you create can survive real life instead of collapsing at the first unexpected expense. And you are living your true note in this very moment.