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Debt Strategy

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Believe me when I say, getting out of debt is tough. It’s especially tough if you have multiple credit cards with high balances, student loans, car payments, and a mortgage. Getting rid of it all takes planning and perseverance. Coming up with a plan that you stick to is extremely important. I recommend writing it all on paper on using a spreadsheet. Documenting your plan helps you stay on track and adjust when necessary as things come up.

I highly recommend that you begin eliminating your debt in the following order: credit cards, student loans, car loans, mortgage. This is because of the interest that accrues on each of these categories of debt. Credit cards usually have the highest interest rates. After all, it’s basically an unsecured loan (meaning there is no assets that backs it up). Student loans are usually the next highest, but the interest rate is much lower than that of credit cards.

Car loans and homes have a low interest rates these days and have been for quite some time. I remember when these loans carried a much higher interest rate, but for the last several years, thanks to our government ever willing to stimulate the economy, interest rates for car loans and homes have been the lowest they’ve ever been.

I’ve said before that personal finance takes focus. After laying out the types of debt you have before you, eliminating credit card debt is your highest priority. It has the type of interest rate that make things get of control really quick. If you’re earning extra cash on the side and free up some cash from reducing your monthly expenses, throw everything you have at this debt until it is paid off. If you find that credit cards companies are sending you advertisements for 0% balances transfers, DO IT. Transferring your current balances to a card that carries a promotional 0% rate is extremely beneficial and stops the interest from eating up most of your monthly payment. This will get you out of debt at much faster rate as all your cash will go straight to the principle.

Repeat this process for all of your cards if you have multiple ones you’re trying to pay off. Commit to a spending plan so you don’t get into the same situation again and have to start over. I’ve had a couple of false starts myself. Trust me, all it does is hold you back.

Next up are you student loans. This can be tricky because you may have several companies you own money to for your education. Me, for example, I had 4 loan servicers. With each servicer I have several loans. I was able to pay off one of these servicers rather quickly because I was able to focus on just one servicer by taking a couple of classes to brush up on my skills. You see, when you enroll yourself in school at least part time, you are able to defer your loans with an in school deferment request. With my need of brushing up on my accounting education and my need to pay off my student loans, it was a winning situation for me.

You will have to weigh the option of picking up a couple of classes and the work involved in taking classes. I took my classes strictly online at the local community college which allowed me to do the work at my own pace. Keep this option open if you feel you’re drowning in student loans. I’ve said before, getting out of debt takes work. If that means I need to take a few refresher courses while I do this, so be it. It’s no different from having to pick up a side job to earn extra cash even after working all day. It’s only temporary. Once I get down to once servicer and not worrying about having to pay the others since they are all paid off, I don’t have to worry about the part time school trick to defer my loans.

Car loans is next to get paid off. By the time I get my student loans paid off however, my car payments will also be done. If my plan goes as schedule, I’m going to have some major free cash flow in the next 3 ½ to 4 years! With my auto loans interest so low, I really don’t have a plan to pay it off. It’ll be paid off as scheduled when the time comes. My debt strategy revolves around student loan elimination. I don’t want to make too many financial priorities, because I’ll never get to them all and I’ll short change myself by focusing on every priority on my list rather than the crucial few: credit card debt, student loan debt, investing to build net worth.

There are many debt strategies you can take. It depends on all the debt you have. In my eyes, there are only two types of debt that take priority over everything else: credit cards, student loans. There’s no need to have these two types lingering over you. They are high stress debts that causes people to worry. They aren’t beneficial to have in the long run and prevent you from building wealth since the cash is being use to dig yourself out of a hole instead of building yourself a foundation. Get your debt strategy on paper and work the plan.

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