LO 3.3.2: Calculate the required payment, interest owed or saved, and payment term in a prioritized debt reduction plan for a client. Flashcards
1
Q
How can we reduce credit card debt, and all debt, so clients can use their surplus capital to increase their savings and go towards investment as well
A
helping clients restructure and gain control of consumer debt is one way to help them free up cash flow for achieving their goals
* strategies such as an annual review of credit cards, interest rates, and fees can result in additional savings for your client.
2
Q
The Snowball Technique
A
Smaller balances are paid off first so clients feel encouraged by their success and motivated to continue the process
- Look for additional cash flow from above min pmts and allocate it to the smallest balances.
- More attractive to those who like easy, quick wins
- See table on p. 114 — 2 credit cards, and 2 auto loans
3
Q
The Avalanche Technique
A
Another debt reduction option that prioritizes high-interest debt to save money
- May take longer to get the first debt eliminated
- When highest-interest debt is eliminated, client focuses on eliminated debt w/the next-highest interest rate, and so on, until all debt is paid off
- More attractive to those who feel successful saving interest costs/analytical types.
- However, if client would feel more accomplished by paying off debt sooner, opt for the Snowball Technique
- Especially if the debt w/highest interest rate has one of the larger balances.
4
Q
Debt Reduction
A
Debt Reduction = More Savings
- The goal of debt reduction is to free up cash flow for achieving client goals
- Debt reduction strategies: conduct an annual (or more frequent) of credit cards, interest rates, and fees.
- For the plan to work, it must be one that clients can commit to executing.
- Whether it’s the Snowball or Avalanche technique, by eliminating consumer debt, they can focus on higher level goals (savings and investments/asset accumulation).
