Good Day Everyone!
This week I’m talking about managing debt, which I’m sure is something that’s on everyone’s mind in one way or another. For most people, the types of debt we deal with on a daily basis include mortgage, student loan, credit card, line of credit (home equity or personal), car loan (lease or finance), heaven forbid… loans from family members, and heaven forbid x1000… payday loans.
Which loan should I pay off first?
I’ve read several blog posts that try to address this question and it usually comes down to one of two methods: 1) Pay off the loans with the highest interest rate most aggressively first or 2) Tackle the loans with the smallest principle outstanding first and keep working your way up. Either way you choose to eliminate consumer debt is a positive thing, but the optimal way to eliminate debt is definitely option 1. It’s argued that a person will be more motivated to tackle debt by reducing the number of creditors they have. In my mind, the fact that you are here reading this shows me you’re already motivated to be better at managing your finances. Depending on how much debt you have, it can save you a lot of interest cost!
Boost your income
When I wrote this heading down, I rolled my eyes. Obviously boosting your income will help pay off debt, why even bother writing it down? I then took some time to think to myself “if my mortgage was at 19%, what would I do to get rid of it?” At that moment, I realized I would do anything from driving Uber on weekends, to working a retail jobs in addition to my day job to pay it off as quickly as possible. Fortunately it’s only at 2.99%, so I don’t have any anxiety about it. So I’ll leave you with a rule of thumb: The higher the interest rate on your high balance loans, the more you should consider taking on side hustles to pay it down. I’ve included a list of side hustles you can do to boost your income and tackle that debt.
If you have a lot of high interest debt (credit card, car loan etc.), it is a good idea to try and get a consolidation loan. This is usually the in the form of a home equity line of credit if you own your home, or some kind of secured line of credit against other assets. You can use a line of credit with a lower interest rate to pay off your higher interest debt and leave yourself with one monthly payment on a loan at a lower interest rate. Talk to your bank for financial advisor to see if you qualify for one of these loans.
Warning: clearing out your credit card debt with a consolidation loan is not a license to start using your credit card for dumb things again!
Look at your investments
If you have credit card debt that has a high interest rate (19% is the most common rate I see) and you also have an investment portfolio of stocks and bonds in a non-registered account then SELL THEM IMMEDIATELY! and use that money to pay off your loans. There is no investment that can give you a guaranteed return that is anywhere near high enough versus the interest rate you pay on credit cards.
Establish an end date
Put all your debts down on paper or a spreadsheet and track your payments on your various loans. This will help you establish a “debt free” date, which is the day your last loan is paid off…obviously. Click here to access an online debt payment calculator which will help you determine how long a loan will take to be paid off. Seeing each payment chip away at your loan balance can be a very motivating thing which can actually speed up the process.
Bottom Line: These are only some strategies you can use to pay down your debt. I picked the ones I felt were the most useful. If you guys have any success stories on how you paid down your debt, I’d love to hear from you and learn how you accomplished it. If you are just getting started on your journey and would like some help, I’d love to hear from you too. Please feel free to contact me in any of the ways below. I will talk to you guys next week.
Have a Great Day!
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