When it comes to paying off debt, it can be very overwhelming. It is somehow really easy to acquire debt and yet it’s a long process to get out of it. You can easily look back and realize you somehow have multiple types of debt with balances you pay towards each and every month. When the balances are large it can take years upon years to pay the debt off and most debts are structured so they self-replicate. For example, you finally pay off your car and then it gets destroyed in a hail storm so it’s forcibly totaled by insurance and then you get another car loan.
From my conversations with people it is common to have at least one or two credit balances that exceed one’s annual gross income. It could be credit cards with a car loan, a large student loan, a mortgage, or something else. My recommendation is to make a plan that matches your personality to pay off the debts as soon as possible. For most people this means listing out all your debts (no matter how large or small) and paying them off smallest to largest. This makes you feel good psychologically because you feel like you’re making progress. I will say some people prefer to save up in a separate savings account until they have enough to pay off a debt because some like to see a balance grow in a savings account vs. paying a balance down, once again psychological.
The challenge with any method of debt payoff is that it is going to be based on your ability to plan and your behavior. You need to stop doing whatever it was that got you into debt in the first place. For most people, this is easy when it’s student loans or a mortgage. However, for things like credit cards this means you stop using them entirely so you don’t accrue balances once again during, or after, paying them off. For car loans this means you pay off your current one and then you begin to save cash for your replacement car, versus getting a new car loan that merely replaces the one you just paid off. This is why it’s critical to have a budget that sets priorities for excess (see the prior post on that topic here). Also, it is important to make sure you save your Financial Independence Fund in case any emergencies come up while you are paying off debt to avoid getting deeper into debt when something unexpected arises. There are several other major items to discuss regarding paying off debt that we’ll cover together in the future so stay tuned.