My Debt Blog

For most people reading the PF blogs out there, they either have debt or are interested in getting out of debt to create wealth. The most basic advice is living on less than you make, and using the excess to make larger payments on the debt. Most if not all debt is bad, but at what order should one go about paying it off?

I feel the following order is the best way to go about it:

1. IRS - The federal government is the last form of debt you should owe or have on the backburner. They can go into your bank account and drain it. When you receive a regular W2 paycheck almost the first thing that comes out of it is the income tax withholding. Get rid of this debt before you do anything else even if it means transferring the amount to a credit card.
2. Credit Card - Many of us got into debt because of how easily these stupid things let us spend money we don’t have. The minimum payment is usually 2-4% of the balance, yet they can carry anywhere from a 0-35% interest rate. This unsecured source of money is the second most important debt to get cleared.
3. Car Note - If you finance a car typically these are a term loan with a set payment over a period of few years. Interest rates can range all over the place because there isn’t a car dealership that won’t find a way to get you into a car, even if that means a 20%+ loan. A lease is even worse than financing a car because you don’t even own the car after you have rented it for a few years. Depending on the rate and balance, the car note could be paid off before, during, or after credit cards.
4. Student Loans - I don’t have a huge problem with taking out a reasonable amount of student loans while trying to get through college. The advantage is the payment can be deferred while in school and later during the repayment, the interest paid on them is tax deductible up to $2500. It is still debt that is important to get paid off quickly in order to build retirement and tackle the mortgage.
5. Mortgage - Most of us, at least younger people starting out, have resorted to using a mortgage to buy a house. It is important to make sure that the payment is between 25-35% of your income. Retirement is also important to have established before tackling this debt. The worst thing one can do is pay off their house without saving for retirement, you’ll just end up selling it. Once the mortgage is gone take the payment on it and save it in retirement and watch the wealth grow.

We’re currently in the middle of this process of paying off debt. Credit cards have limited our cash flow and we want it back! Our student loans are a looming amount but without making monthly credit card payments we will be able to knock out large amounts of them every month. It all takes time but this is a crock pot process not a microwave solution.

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