This week we are going to be talking debt and debt prioritization.
Debt comes in many different forms. From credit cards to student loans, mortgages to car notes and more, it's easy to get overwhelmed trying to figure out what to focus on especially if you have multiple creditor accounts.
The way to get past the stress is to create a strategy of attack that will ensure you are paying down your balances as quickly as you can afford to without getting stuck in an interest cycle.
What is an interest cycle?
This is a cycle many people fall victim to and it results from paying the least amount of money required on your debt (AKA minimum payments) which in turn causes you to pay the maximum amount of interest possible to your creditor.
Interest payments are how your creditors make money and so it is to their benefit to keep you in a loan as long as possible so they can earn the maximum amount of interest from you. Just making minimum payments and not having a strategy to knock out your debt can keep you in that cycle for a very long time.
How to prioritize your debt
Creating a strategy of attack starts with prioritizing your debt and this means listing every single debt you own, by creditor, interest rate and balance, and determining a debt pay off method.
Debt pay off methods
There are two main methods when it comes to paying off you debt.
Method 1: Pay off debt with the highest interest rate first
This plan will save you money in interest payments i.e. By targeting high interest debt first, your overall interest payments will be lower. To use this method, you'll need to categorize your debt from highest to lowest interest rates and pay as much as you can to the debt with the highest interest rate while paying the minimums to all the others. Once you are done with the first highest, rinse and repeat for the second highest etc.
Method 2: Pay off debt with the smallest balance first AKA the snowball method
Human beings thrive on quick wins and so paying off the smallest balances first regardless of interest rate might work for you. You may not save as much on interest payments but you'll feel motivated from your quick wins. To use this method, you'll need to categorize your debt from smallest to largest balance and pay as much as you can to the smallest debt while paying the minimums to all the others. Once it's gone shift your focus to the next smallest debt etc.
Tips to be successful paying off your debt
- Make sure any extra debt payments you make ALWAYS get put against your principal balance. Some creditors automatically assign extra payments towards interest if you don't specify.
- Create a budget each month (we'll be discussing budgeting soon) and build your debt repayment into your budget.
- If you earn any extra income or get a bonus, before you spend any of it, put some of it towards your debt.
- Put money in an emergency fund (your goal should be 3 to 6 months but start with $1000) so if an emergency does come up, you can leverage that fund instead of having to rely on credit which will increase your debt load.
Paying off debt depending on how much you owe can take a while but with the right focus you will start you see progress and will make big strides towards eventually getting rid of your debt.
Your challenge this week is to use the downloadable worksheet on this page to create your debt prioritization and choose a pay off strategy.
- Gather all your debt statements, credit cards, student loans, car notes, medical bills etc
- In your worksheet, write down the amount you owe for each account along with the associated interest rate and minimum payment.
- Prioritize them accordingly based on what you've learnt above using the payoff method of your choice.
- Plan to pay the maximum you can afford to your priority 1 debt until it's gone and the minimum payments to all others. Continue with this approach until all your debts are paid.
P.S. Don't forget to share your progress in the Facebook group!
It's week 6 of The 26 week savings challenge!
This week, your savings deposit amount is $23.00
(If you've been consistent with your deposits, this week's deposit will bring your balance to $78!)
- Make your transfer.
- Check off this week's amount on your savings challenge schedule.
- Share your progress in the Facebook group!
Note: This challenge will be on-going throughout this accountability program in addition to your other weekly challenges.