Host
Priscilla Alvarez
Podcast Content
Paying down debt sooner comes with the advantage of decreasing how much you owe in interest. Whether or not you should pay off large or small debts first depends on your psychological make-up.
The first step is to look at your budget and figure out how much you are paying towards debt each month. Whether you use an app or a spreadsheet to build a budget, once you have seen all of your income and expenses laid out, you can begin planning for how to repay the debt. Once you have a basic budget in place, and know what the minimum amount that you will have to pay each month on your debt, you can work out whether or not there is discretionary income that you could put towards extra debt payments. As you start planning for your debt repayment, take some time to figure out your baseline budget, or the minimum you need to pay on your essential bills.
You will also want to know what minimum payments you are comfortable making each month for all your debt balances. Set aside plenty of time to review your debts and take notes about what you owe who, what interest rates are charged, and how many months are left until payment is due. Make sure you are paying the minimum on all other bills, and sending extra money for smaller bills until they are paid off completely. Once the smallest debt is paid, you send money that was paid to that debt to the card with the next-smallest balance.
If you were throwing $150 toward your smallest debt, now you have freed that money to put towards the next debt on your list. So, dedicate the extra money every month to paying off the smaller debts first; make just minimum monthly payments to the others. The debt avalanche method involves paying down the highest-interest debt first , which saves the most money in interest.
For individuals carrying a lot of debt, the debt snowball method may even decrease the amount of time you need to pay down debt by several months. In this scenario, the avalanche method will allow you to pay off the credit card debt first, and then let you pay off your remaining debts over the course of 11 months, paying off a total of $1,011.60 of interest. If the avalanche and snowball methods leave you spinning your wheels, still paying hefty interest rates on more cards, you could consolidate credit card debt using a credit card consolidation loan or a small personal loan.
Combining high-interest debts into a single source, like a debt consolidation loan, with an interest rate that is ideally lower, can simplify your monthly payments and make it easier to focus your efforts on repaying the debt. While a debt consolidation loans rate may be fairly high, it may still be lower than the combined interest you are paying now, in which case the debt consolidation loan would be a good option. With a debt consolidation loan, a creditor pays off all of your existing debts and rolls it all together in one new loan, with a single payment.
You would be paying off existing debts, then have just one monthly debt payment to manage. While you will still have the same total debt, you probably will not pay an excessive amount in interest fees down the road. In fact, during your repayment period, assuming the 4% minimum payment, you would have spent more than 10 years paying that debt down, at the cost of $2,627 in interest.
Make only the minimum payment, though, and it would take more than 30 years -- and cost you over $35,000 -- to repay that debt, according to this Bankrate calculator. If you only make a $121 minimum monthly payment, it will take five years to pay off $5, and you will pay a total of $2,573 in interest. Of course, you should still be making the minimum payments on all of your credit cards as long as they are actually being paid back, but it is important that you make reducing high-interest debt down to nothing as your priority.
Once your creditors pay your credit card balances, you will only need to repay them with a monthly payment, which helps simplify the process of paying down debt. You then pay monthly credit card payments throughout your interest-free period, meaning that each cent you repay goes toward paying down your debt, rather than toward paying back bank fees. It makes financial sense to pay off your more expensive debts first, in order to minimize the amount of interest payments you have to make, if at all possible. The result is you come out of debt paying the smallest possible amount of interest.
Right now, you should simply focus on making realistic payments toward your debt. If you have any other financial goals on the horizon, particularly ones that would require strong credit, such as buying a house, it may make sense to first focus on paying down debt. You will want to establish a family budget before trying to tackle your debt and savings at the same time. If times are particularly tough, and you simply do not have the cash, then you should focus on your current debts, and consider skipping payments on older bills that are seven to 10 years old, and even older.
The snowball approach could save you money over the long term, as youall pay down the more expensive debts earlier than later. With the debt snowball method, youall be paying off smaller balances first, which may be more motivating because your balances are going to go away faster. It can make more sense initially to pay these loans over time on schedule rather than paying more money to get them paid off sooner.