Building wealth often begins by eliminating debt. You cannot save money if you're sending it to the bank, credit card company, auto finance firm, or Sallie Mae. Wealth accrues when money stays in your account, not when it leaves for someone else's balance sheet.

What many people don't know is that the bedrock of retirement isn't Social Security or even a 401(k). A secure retirement often rests on a debt-free foundation.

And yet, Americans over 65 are carrying more debt now than ever before. In 1989, just 31% of U.S. households headed by someone over 65 carried debt. By 2016, that number had increased to 61% according to a Congressional Research Service report. Today, Americans over 70 owe $1.1 trillion on mortgages, autos, credit cards, personal loans, and other forms of debt.

"When you're no longer working, but you still owe money, your financial safety net gets frayed," says Juliette Cooke, Vice President and Personal Financial Advisor at Cooke Wealth Management. "No matter where you are in your financial journey, it's time to kick debt out of your home — for good! 

Financial Reasons You Shouldn't Retire With Debt

Debt brings financial, emotional, and spiritual consequences (Proverbs 22:7). Let's look at four reasons not to retire with debt.

1. Debt payments chip away at what you can spend on monthly expenses. Your recurring costs may decline in retirement, but they don't stop altogether. You'll still want to turn on your lights, fill up your car, and make regular trips to the grocery store. If you have to pay creditors on top of that, your budget can get uncomfortably tight. Items purchased today on the debt will always cost more when paid for over-time – a function of interest charges and payment schedules.

2. Debt limits the scope of your retirement options. Do you plan to travel, invest in a new home, or serve God as a volunteer in retirement? Debt can stamp out those ambitions fast.

3. Debt elevates stress. Have you ever felt like debt was a burden? You're not alone. Dr. John Gathergood of the University of Nottingham studied the correlation between debt and stress. He discovered that people who struggled to pay their debts are twice as likely to suffer from mental health conditions such as depression and anxiety.

4. Paying off debt often maximizes the positivity in your life. Debt not only elevates stress, but other studies show that it is a significant source of marital discord and a major predictor of divorce. 

The Debt Snowball: A Proven Way to Pay Off Debt Forever

If you grew up around snow, you know the fastest way to build a snowman is to start with a basic snowball. Roll the ball through the snow with your (gloved) hands. As you roll the snowball, it grows bigger and bigger until it's large enough to form the base of your snowman.

The same principle can apply to paying off debt. 

Here's how the debt snowball works:

You write down all your debts (except your home) from smallest to largest. Don't worry about whom you owe, what the interest rates are, or how much time you have to pay them off. Just write them down in ranked order from the smallest debt to the largest.

Make the minimum payment on each debt. Then invest all the extra money you can scrimp and save toward paying off the smallest debt first. As soon as you have eliminated that debt, invest your payment on the next smallest debt — working your way up to the largest debt. Keep repeating the process until you are debt-free. In this way you more quickly eliminate one debt, then another and then another - what a great feeling it is to pay off (completely) a debt!

Financial advisor and popular radio host Dave Ramsey popularized the debt snowball method. He encourages his listeners to begin the debt snowball as soon as they have $1,000 in an emergency fund. "Getting out of debt is no walk in the park!" Ramsey says. "It takes some serious dedication and gazelle intensity to shake off all those shackles. But it is possible."

What Happens When You Don't Use the Debt Snowball?

Critics of the debt snowball claim it doesn't make financial sense to ignore interest rates in your debt reduction plan. Ramsey insists the emotional impact of seeing your debts get paid off one by one fuels your commitment. As he puts it, "If you were so fabulous with math, you wouldn’t have debt."  

Who's right — Ramsey or his critics?

Researchers at Harvard Business Review looked at 6,000 people who were paying off debts over 36 months. The study concluded that the debt snowball method was the most effective approach. 

"Focusing on paying down the account with the smallest balance tends to have the most powerful effect on people’s sense of progress – and therefore their motivation to continue paying down their debt," the researchers wrote. 

So what happens when you don't use the debt snowball method?

The stress of debt can continue unabated. Rather than making one large payment every month, people often feel like they're making several large payments. But unlike with the debt snowball method, nothing seems to happen. The needle never moves. No money gets freed up for fun or for savings towards retirement.

"We find that people are paying a little extra towards each loan, and there isn't always much thought or structure behind their actions. Often there's a lack of motivation or accountability" Juliette Cooke says.

The debt snowball offers a proven, effective way to set and accomplish clear goals for paying off debt.

Why We Recommend the Debt Snowball

As you might have guessed by now, Cooke Wealth Management strongly recommends leveraging the debt snowball process to get out debt.

We base our recommendation on several pillars.

First, evidence shows the debt snowball works. People who commit to paying off debt are often more likely to stick with their commitment and accomplish their goals with this method than with another approach.

The debt snowball is effective because it works with — not against — what we know to be true about how humans behave. We're more likely to continue with a plan when we receive little rewards for our accomplishments along the way. Often Focusing on some of your smallest debts first helps you stay mentally engaged with your debt-elimination strategy.

"There's often an emotional factor to completely paying off or eliminating even one loan," Juliette Cooke says. "The debt snowball method can also provide a visual tool, so you can track where you are in the process and actually see the list of loans getting smaller.”

Conclusion

One of the highest, sturdiest barriers between you and wealth is your debt. Debt elimination can play a major role in helping you achieve financial freedom. Furthermore, retiring with minimum debt can set you up to enjoy more of your post-career years and to give more of your time and treasure to serving God’s purposes for this next season of your life.

Contact us at Cooke Wealth Management to find out how we can help you plan for your financial future and implement your debt elimination strategy.