As I was doing a little research for this article that I’ve been wanting to write about, I never knew that the term “financial triage” was a real term and had an actual definition. I had always thought it was coined by people in the debt management field. I think it has something to do with hospital patients and their ability to pay their bills. Regardless, I‘d like to discuss with you my own version of financial triage, including when it should be performed and how to do it the right way.
What is it?
The definition of triage is basically sorting through people to determine who needs immediate medical treatment and in which order. Therefore, my definition of financial triage is to take a hard objective assessment of your debts and prioritize in which order you will pay them off. This will allow you to take a prudent, financially organized approach to solving your debt.
Prioritize Your Debts
If you are in need of financial triage, then it is assumed that you have some debt in which you are paying interest on. I would include all debts besides your home loan. You need to divide up your debts, or assess them, based on two different criteria. One is the amount of the debt and two is the interest that you are paying on each debt. I would make two lists with all your debts prioritized according to each set of criteria.
You Make the Call
At this point, you have two choices to make, as there are two schools of thought regarding paying down your debt. I don’t have technical names for both, but you may have heard of the first one. It is called a “debt snowball.” In this process, you basically pay off your debts in their order of size. Meaning, if you have debts of $500, $1000 and $1500, then you would pay the $500 one off first and move up the list. This disregards the amount of interest that you are paying on any of your debts. This way you can build up momentum and gain confience.
The second is sometimes known as “debt avalanche,” where you start with the highest interest rate and work your way down, like an avalanche starts at the top and works its way down the mountain. Meaning, in the second list you have created, where your debts are prioritized according to their interest rates, you would start with the debt with the highest interest rate, pay that off (while still paying the minimums on all other debts) and cross them off the list in that order. This strategy allows you to eliminate the most damaging debts first.
Which Approach is Best?
Should you choose debt snowball or debt avalanche? Both approaches have their pros and cons. With the debt snowball, you’ll be able to celebrate so-called “victories” in your journey out of debt in a quicker fashion. Depending on your level of credit card debt, you may want to consider this. The last thing that you want to do is to get discouraged and give up.
If you want to take a strict financial approach to your credit card debt and solve it with the absolute least amount of money paid during the process, then you would pay off your debts according to the interest rates that they carry in the debt avalanche approach. However, it could be a long time before you can cross your first debt off of your list, so you’d need to be more of a self-motivated type. This means you can stay on track and focused without the need for these psychological victories along the way.
For those of you that still have any real kind of credit card debt (or any debts that you’re paying interest on), financial triage can be a great way to help organize your trip to financial freedom.
Have any of you out there tried either approach?
(photo credit: meddygarnet)