I hit on the main ways of diagnosing your financial health in this past post. I’m going to use Wednesdays to go further in depth on each point since I truly believe that financial health leads to less stress and happier lives.
I have already covered the first three points – Spend Less Than You Earn, start an Emergency Fund, and review Retirement Savings. The fourth point was to take a look at your debt. This means actually making a list of your debts and coming up with an aggressive plan of attack.
Make a List of Your Debts
There are a variety of debt elimination methods, but I’d start with prioritizing your list of debts. Place your high interest debts like credit cards or payday loans at the top and your lower interest debts like car loans, mortgages, and student loans at the bottom. I’d go even further and list the high interest debts from least to most actual debt and do the same for the lower interest ones as well. This completed list will show you which debt to attack first.
As a side note, high interest debt is so detrimental to your overall financial health, I’d rate its importance above most retirement savings. If I had debt that was at 10% or more, I’d keep a two month emergency fund, only contribute the minimum needed to get my full employer match on my 401k, and then I’d take care of the debt.
Attack the Debts in Order
In order to pay down debt, you will need extra money every month- you’ll need to consistently spend less than you earn. While paying the minimums on all debts, your extra money should be applied to the first debt on the list mentioned above until it’s completely wiped out. After paying off one debt, put that entire amount towards the next debt on the list. Repeat this process until you are completely debt free.
Freedom from high interest debt will give you options and lighten your mental load significantly. Freedom from all debt will give you wings…so I’ve heard. 🙂
Our Debt Situation
As I write this post, my husband and I have about $10,000 left on a 4.6% interest car loan we took out in 2008 and $73,000 left on our 5.375% interest mortgage. Since finally coming to my senses at the beginning of this year, we are hitting the car loan pretty hard whenever possible. We’ve been overpaying our mortgage by $160 a month since it started in 2007. We’re currently on track to have the car paid off sometime in 2011 and our home paid off by the end of 2017. I cannot wait for the feeling and options that come with complete debt freedom.
How about you? What kind of debts are you trying to eradicate? Do you have any suggestions for us?