Debt has become a part of life for most Americans, and firefighters are no exception. With mortgages, car loans, student debt, and credit cards, many of us find ourselves sinking into debt that keeps us chained to work just to make ends meet. But the truth is, debt keeps people stuck in the rat race. It builds up interest, erodes hard-earned money, and blocks us from the freedom we work so hard to achieve.
And the numbers are staggering. As of the second quarter of 2024, U.S. households held approximately $5.34 trillion in non-mortgage debt.¹ This debt burden isn’t just about credit cards, though that’s a big piece of it. Credit card debt alone stands at $1.142 trillion, while auto loans add another $1.626 trillion to the pile, followed by student loans at $1.57 trillion. The rest—personal loans and other forms of consumer debt—make up the remaining amount. Altogether, this non-mortgage debt keeps millions of Americans from getting ahead financially, turning monthly incomes into nothing more than a way to service the interest on their debt.
| Type of Debt | Amount (in Trillions) |
|---|---|
| Credit Card Debt | $1.142 |
| Auto Loans | $1.626 |
| Student Loans | $1.570 |
| Other Debts (Personal Loans, Consumer Debt) | $1.002 |
| Total Non-Mortgage Debt | $5.340 |
Debt doesn’t just grow on its own, though; it’s the interest that pushes it higher and higher. Understanding how interest is calculated can help you figure out which debts to tackle first.
How Interest Works: Simple vs. Compound
Simple Interest: Simple interest is straightforward. It’s calculated only on the principal balance—the original amount you borrowed. For example, if you take out an auto loan, the interest you owe is generally based on the amount of the loan itself, not on any previously accumulated interest. Double-check your loan agreement to be sure, though. This type of interest keeps costs predictable and manageable, making it easier to plan for payments.
Compound Interest: This is where debt can get dangerous. Compound interest builds on itself, adding interest not only to the principal but also to any unpaid interest. Credit card debt is notorious for this, making it tough to pay down if you’re carrying a balance. When interest compounds daily or monthly, a small debt can quickly grow into a massive financial burden, costing way more over time than simple interest debt.
If you’re dealing with high-interest, compounding debt, prioritize paying that down first to stop it from spiraling out of control. But how do you know what kind of debt you have?
Types of Debt: Not All Are Created Equal
Debt can generally be split into two camps: good debt and bad debt. Let’s break down what makes each type different and why handling them properly can impact your financial well-being.
Types of Good Debt
Believe it or not, some debt can actually be useful. Good debt is debt that has the potential to increase your net worth or improve your future finances. Examples? Mortgages and student loans. These types of debt usually have lower interest rates and may even come with tax advantages. A mortgage helps you build home equity, while a student loan can boost earning potential over time.
This doesn’t mean good debt should be left to grow forever, but paying it off doesn’t have to be your highest priority if it’s manageable, comes with a low interest rate, and is overshadowed by high-interest bad debt.
Types of Bad Debt
Then there’s bad debt—the kind that pulls down your finances without offering much in return. Credit cards, payday loans, and personal loans typically fall into this category. Credit cards, in particular, are loaded with high interest rates and compound interest, which means interest is calculated not just on what you owe but on the interest itself. This can make a small debt balloon fast. Payday loans are even worse, often trapping people with fees and sky-high interest rates.
The goal? Get rid of bad debt as soon as possible, starting with the worst offenders. And if you’re like most Americans, the place you’ll likely need to start first is your credit card debt.
A recent survey by Clever Real Estate found that 3 in 5 Americans (61%) are in credit card debt, with the average amount owed sitting at a hefty $5,875. Even more concerning, 23% of people report going deeper into credit card debt every single month, while 14% admit to missing at least one payment this year. ² For public servants like firefighters, who often operate on a fixed income, that kind of financial stress is unnecessary and only serves as a roadblock to long-term financial success.
This chart illustrates the growth of debt over three years with both simple and daily-compounding interest rates on an initial $5,000 balance at 18% APR. The shaded area shows the extra amount due to compounding interest. For educational purposes only; your results may vary depending on your interest rate and compounding frequency.
Four Debt Reduction Strategies
Now, let’s get into some straightforward ways to chip away at debt. None of these strategies are magic, but they’re effective when applied with consistency and discipline.
1. Debt Snowball Method
The Debt Snowball method is all about knocking out the smallest debts first to build momentum. Here’s how it works:
- List all your debts from smallest to largest balance.
- Focus on paying off the smallest debt while making minimum payments on the others.
- Once the smallest debt is gone, move to the next smallest, and so on.
The idea here is to get a few wins under your belt, which can keep you motivated and make the process feel manageable. Psychologically, the Debt Snowball method works for a lot of people, especially if seeing immediate progress helps keep you on track. In fact, researchers from the Kellogg School found that people with large credit card balances were more likely to eliminate their entire debt when they focused on paying off cards with smaller balances first, even though it doesn’t always make the most sense from a mathematical perspective.³ Sometimes, the best method is the method you stick to.
2. Debt Avalanche Method
The Debt Avalanche is more aggressive and is the exact opposite of the debt snowball method. Instead of focusing on balance size, you pay down the debt with the highest interest rate first. Here’s the process:
- List your debts by interest rate, from highest to lowest.
- Put any extra money toward the highest-interest debt while paying minimums on the others.
- Once the highest-interest debt is paid off, shift your focus to the next highest rate.
Paying down large, high-interest debt saves more money on interest in the long run compared to the Debt Snowball, but psychologically, it may be more challenging to stick to as the benefits won’t be as immediately apparent as knocking out a piece of debt quickly.
3. Balance Transfer
If credit card debt is your main issue, a balance transfer could help. Many credit cards offer a 0% APR on balance transfers for a limited time (usually 12-18 months). Moving high-interest debt to a 0% card can buy you time to pay down the balance without racking up more interest.
Here’s how to do it:
- Transfer your balance to a 0% APR card.
- Pay as much as possible each month to knock down the balance before the promotional period ends.
- Avoid new purchases on the card to keep the balance going down.
Be sure to read the fine print, as some cards have transfer fees or high rates that kick in after the promo period.
4. Debt Consolidation
For those juggling multiple debts, debt consolidation can make things simpler. It’s exactly as it sounds: combining several debts into one loan with a lower interest rate, such as a personal loan. Here’s what that looks like:
- Apply for a debt consolidation loan with a lower interest rate than your current debts.
- Use the loan funds to pay off your other debts, leaving just one monthly payment.
- Make consistent payments to pay down the balance without taking on new debt.
Debt consolidation can help you get organized and reduce monthly payments, but it only works if you stick to a disciplined repayment plan. Most importantly, don’t use consolidation as an excuse to rack up more debt.
In Conclusion
Probably the biggest thing holding us back from financial freedom is our inability to live within our means. As a public servant, you have a huge advantage: you know exactly what to expect each month, making it easy to budget and understand how much money you can spend on things like living expenses, entertainment, and new toys. But we shouldn’t let today’s wants compromise tomorrow’s needs. We just have to say no to easy credit, stick to a budget, live within our means, and be prepared for financial emergencies. Maybe that’s easier said than done, but just like consistently hitting the gym, in a few years, you’ll be thanking your past self for sticking to your guns!
If debt is holding you back from achieving your goals, consider one of these methods and make a commitment to change your financial future. It might not happen overnight, but every dollar paid off brings you closer to financial freedom. If you have any questions or would like a plan to pay down your debt in an efficient manner, click the button below.
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