If you are wondering what debts to pay off first, you are not alone! You should check out our guide here to learn how to make a debt payment plan.
Almost every person in America has some form of debt. The average debt, not counting a mortgage, is roughly $38,000. While it may not seem like a crazy amount, remember that you also have a mortgage payment or rent each month.
The question is, what is the most efficient way to pay off your debt? How do you know what debts to pay off first?
If you’re looking to make a big change to your finances this year and finally be debt-free, we can help. Keep reading for our top tips on paying down debt.
How to Decide What Debts to Pay Off First
Debts come in many different shapes and sizes, so to speak. There are high-interest credit cards with low balances, low-interest loans with high balances, and everything in between. But what factors go into deciding what debts to pay off first?
High-interest rates can be devastating on your finances. Every time you make a payment (especially a minimum payment), most of your money goes toward paying off the interest, rather than the principal amount. This prolongs the length of your loan and costs you more money in the long run.
Total Loan Amounts
High-dollar loans can seem imposing. However, they often carry lower interest rates. They’ll take longer to pay off but will cause less damage to your finances from interest.
High-dollar loan amounts with high interest can be devastating to your overall budget, making it quite difficult to get out of debt.
The minimum payment on a debt may be one of the leading factors when choosing what debts to pay off first. You may be anxious to clear up a large monthly payment. Alternatively, it may be more beneficial to pay small debts off first.
The right way to pay off your debt depends entirely on your financial situation. However, to get started and maximize your efficiency, we recommend putting yourself on a budget. Then, get rid of all unnecessary expenses (eating out, shopping, memberships, subscriptions, etc.) and use the extra money in your budget to go towards debt.
Now that you’re set up for success, it’s time to decide what debts to pay off first. Are you ready?
- Start with the lowest debts first (this will give you more money in your monthly budget as soon as possible)
- Use the money that was going towards the first debt to put towards the next lowest debt
- Repeat the process (each time you pay off a debt, it adds the funds going toward debt each month)
Keep in mind that your financial situation may not be as simple. There’s nothing wrong with hiring someone to help. They can guide you in learning more about debt consolidation loans and provide you with options that best fit your status and preferences as a loaner.
Additionally, paying off debt requires sacrifice, dedication, and discipline. It won’t be easy cutting back on your expenses and refraining from dinging out or unnecessary shopping. However, once you do, you’ll experience financial freedom unknown to most Americans.
Looking for More Financial Advice?
Now that you know what debts to pay off first, are you ready to make the commitment? If you want any extra tips on how to cut back and save more money, be sure to check out some of our other budgeting articles before you go. The more you know about finances, the easier it will be to get debt-free.