Mixed Bag Monday: Of Debt and Debt Elimination

Nobody wants to be in debt.  Having people or corporations to whom you owe money is never a good thing; it forces you to use your (always limited) resources to enrich someone other than yourself, and decreases your ability to meet your own goals.  It’s not the sort of thing that anyone wants to face.

There’s quite a bit written about how to pay off debt and get your finances in order; it’s one of the most popular financial topics, second perhaps only to investing.  I can’t hope to cover all the varieties of debt elimination in a single post, but hopefully this can help you get on the right path (and since I could use some help in that area myself, perhaps help me organize my thoughts on what to do myself).

Q: What’s the Best Way to Pay Off Debt?

A: Ah, starting off with a tough one.  There are a number of different approaches to paying off debt, with numerous proponents of each.  Strictly mathematically, the best way to pay off debt is to pay off the highest interest debt first (while paying the minimum on all the other debts, of course).  That’s far from the only approach; another popular method is to pay off the lowest-sized debt first (a la Dave Ramsey), which has its own advantages and disadvantages.  My first choice would be the highest interest rate first (although, there are other considerations).

Q: How Should the Type of Debt Influence Payment Order?

A: In general, minimally; the type of debt should be a secondary consideration.  That said, different debts are treated differently under the law, and depending on your situation, you might need to modify your payment order.  For example, credit card debts are wiped out by bankruptcy, while student loans aren’t.  So, if you are approaching bankruptcy, prioritizing student loan payments over credit card payments, regardless of interest rates, might be in your best interest (although, if you are approaching bankruptcy, you should talk to your lawyer and find out your best option).

Q: What Priority Should Debt Repayment Take in My Financial Plans?

A: It should be near the top of your money goals; there are not too many things that should take higher priority.  I can only think of a few off hand; building up an emergency fund (at least a few months of expenses), keeping at least some money flowing into retirement investments (no sense getting out of debt if you don’t have any longer term goals to meet), and continuing to donate to charity being the top of the list.  But a sizable amount of your income should go to paying down debt, until you have gotten rid of the debt.

Q: Should I consider Debt Consolidation?

A: I would be very leery about debt consolidation in most situations.  Particularly when it involves debt consolidation companies, there is the potential for them to make things worse, not better (by withholding payments from your creditors to force a better deal, wrecking your credit in the process).  You can consider DIY debt consolidation, by getting a loan from somewhere like Lending Club and using it to pay down your other debt.  (Just make sure you don’t use it as an excuse to run up more debt and get hit by a double whammy of debt repayment).

Q: How Do I Find the Money for Debt Repayment?

A: It can be tough to find extra money to cut down your debts (if it wasn’t, nobody would have debt troubles in the first place).  There are numerous areas where you can cut down  spending to put more money toward debt repayment; basically any area of your life you haven’t already cut to the bone (which for most of us means all the areas of our lives) can be cut.  Also try building up your income, either by getting a raise or building a side income.  Remember, though,  to cut down debt before you start further spending.

Alright, that’s it for our short introduction to debt repayment; here’s to good luck for all of us in our debt repayment goals!

3 Responses to Mixed Bag Monday: Of Debt and Debt Elimination

    • Joe, you raise a good point. A possible bankruptcy does really shift your financial priorities. If there is a bankruptcy possible, unsecured debt becomes a much lesser issue; if it remains highly unlikely, though, paying down that expensive (and non-tax deductible) unsecured does take a higher priority. Of course, there’s plenty of other issues you are probably dealing with if you find yourself facing a bankruptcy…

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