A post from Heather C., our CMF Finance Coach:
Most of Us Have It. Few of Us Want It.
And It Won’t Go Away on Its Own.
Now that you’re on track to save yourself thousands of dollars based on my cost savings article, you’ve decided to pay down some debt. Good for you! For some people, prioritizing debt come easily. Others just aren’t sure where to begin.
Here’s a prioritized list of which major types of debt you should pay down first. Begin paying off #1 until you have worked your way through the list.*
1. Credit card debt – Eliminating credit card debt should be your #1 financial priority. If you have balances on more than one credit card, start with the one that has the highest interest rate.
Keep in mind that while credit card debt is never a good thing, credit cards themselves are not all bad. If you don’t have a credit history, using credit cards is a great way to build your credit score. Plus, credit cards can offer you additional protection on your purchases, and there are all kinds of rewards programs out there. Just make every effort to pay off your balance in full each month.
2. Car loans – These are high on the priority list because almost all vehicles depreciate as time goes on. If you’re one of the lucky individuals who drives a car that is actually appreciating in value, you’re probably not reading this article. And if you are, mind if my sons take a ride in it? Just be warned that your car will probably begin depreciating immediately after they get their dirty little hands on it, so read on.
As with credit cards, if you have more than one auto loan, begin paying down the one with the highest interest rate first. That is, afteryou’ve eliminated all your credit card debt.
3. Student loans – Theoretically, the more educated you are, the higher earnings potential you have, so stop putting off that Master’s degree in Puppetry (oh yeah, it exists). You can wait to pay this one off until after you pay off your credit cards and car loans.*
Or, you can wait even longer than that. Student loans are generally low-interest loans, and in theory, you can invest your money and get a return that’s higher than the cost savings of paying off your education loans early. The student loan interest deduction is scheduled to go away in 2013, so take that into consideration when deciding where to put your extra cash.
4. Mortgage – This is probably going to be single largest amount of debt you have. Realistically, many people take the full 30 years to pay off their home mortgages. And why not? Interest rates are typically quite low, and you get the tax benefit of deducting your mortgage interest. If you’re looking to pay down debt, make this one your last priority.*
When you look at all the ways that money can be borrowed, debt can accumulate quickly. If you’re overwhelmed by the amount of debt you have, start small. Always pay more than the minimum on your credit card, even if that means simply adding $10 more per month to your payments. The amount of interest you’ll save by merely paying a few more dollars per month can be quite significant.
* Last, but definitely not least, it’s IMPORTANT to note that before you consider paying off your debt early (especially student loans or mortgage), make sure you have both an emergency fund set up and a retirement plan with regular contributions established. Eliminating debt early might feel good, but it does not result in any liquid savings.
The last thing you want is to end up debt-free, but without a dime in savings.
Heather Cellini
**Have a comment or question for Heather? She’ll be checking our comments and will answer any questions you have!**
Hi! Stopping by from MBC. Great blog!
Have a nice day!