Have you ever felt like all you do with your money is to pay off debts? You live paycheck to paycheck because more than 50% of your salary goes to paying your credit card debts, mortgage, car loan, student debt, and other kinds of debt you have incurred in the past years. We are all trying to pay off multiple debts at once. Even billionaires have debts. Can you imagine that? You’ll be surprised how much debt these billionaires are in.
With the outstanding balances of your current FHA loan and credit cards, which of these do you think you should pay off first? Those high-interest debts? Your student loan? It’s not always ideal to pay off all your debts at once unless you have the money for it. It’s more prudent to tackle high-interest debts first while saving up for retirement or investing your money in mutual funds or stocks.
What Debts Should You Focus on First?
Your credit cards, car loans, payday loans, utility bills, and medical dues are all high-interest debts. The average interest rate for credit cards is around 24% annually. That’s about 2% monthly, although good rates are mostly enjoyed only by those with good credit standing. Forget about the possibility of low-interest rates if you have a low credit score.
You should also pay off your car loans faster because a car loses its value almost every day. As soon as you drive home your car, it has already started depreciating. Paying interest on an asset that is losing value every day seems to be counterintuitive. Ideally, you should pay off your car loan in three years. That gives you enough time to save up for your next car two years after paying off the debt.
Then, of course, your medical bills could earn interest on interest. Try to tackle those, as well as any debts you owe a bank. Any debts with interest rates in double digits should be paid off as quickly as possible.
What Debts Can Wait?
Your home loan and student loan are low-interest debts. It is not a good use of your money to pay these off while your high-interest debts are accruing more charges. You can make minimum payments for these monthly while you’re pouring in all your extra cash on your high-interest debts.
Also, if you have not exceeded the income limit, your student loan could be liable for a $2,500 deduction. Some federal programs could slash off your student debts in exchange for service to the country. Look up these programs. Your home mortgage is likewise low in interest. You can even get a deduction if you purchased your home before December 2017.
How to Pay off the Debts Smartly?
Focus on paying more than the minimum amount due for your credit card debts, car loans, payday loans, and medical bills. The loan with the highest outstanding balance and interest rate should get the bulk of your monthly payments. However, remember that this doesn’t mean you can ignore the other debts such as your student loan and home mortgage. You still have to make the minimum payments required for those on top of paying off more than the minimum amount due to your credit cards.
You can also consider consolidating these debts, so you’ll only have to make the payments to the financial institution that will shoulder the total amount of the loan. However, this might not be a smart move because you will be forced to pay a single large amount each month. The only advantage is that you could pay off your debts in a shorter amount of time. You can then move on to tackle your smaller-interest debts.
That is the avalanche method. The other method of debt-payment is the snowball technique. It is when you try to finish off the small debts before moving on to the larger debts. The idea is you could score a “win.” It’s a mind trick that makes you think it’s possible to pay off debts as long as you follow the schedule. However, your larger debts will gain more interest. You’ll be left paying off a huge debt after scoring a win on those smaller debts.
Ultimately, you have to be disciplined enough to focus on paying off the debts than spending your cash on nicer things. You have to zero in on your focus to be debt-free. Whether you choose the avalanche or snowball method, the point is to start eliminating those debts right now.