How to Prioritize Paying Off Debt
More than likely, at some point in your life you are going to borrow money. Perhaps you are planning to go to college or a trade school. Maybe your car has gotten to the point where repairing it is no longer an option and you are in the market for a new one. Of course, you could be starting your family and are trying to find a place you can call home. There are going to be many stages in your life where you may not have the money you need to achieve a goal or to take advantage of an opportunity. Borrowing money in all of these situations can potentially create a large amount of debt.
Many people carry debt from multiple sources, such as credit cards, student loans, mortgages, or auto loans – the list goes on and on. According to CNBC Select, the average American is $90,460 in debt. Repaying debts can seem overwhelming and for some, it can prove to be too much and can lead to bankruptcy. While we are bankruptcy lawyers, we also want to give you the knowledge you need to dig yourself out of debt. Bankruptcy attorneys can do more than help you through bankruptcy, we can help you never get there in the first place!
Figuring out how to tackle debt can be a difficult task. Do you start with your credit card or your personal loan? Where should you focus your efforts? Regardless of how much or what kind of debt you have, the most important thing is to start now! The longer you have debt, the more you will be paying through interest. Some debt accrues interest every month while other debt accrues interest every day! Waiting to pay back debt creates a compounding effect that can be very difficult to overcome the longer you wait.
Paying back debt takes discipline and hard work. The first thing you should do when you start your debt repayment journey is to create a budget. Write down a list of all of your expenses that you have each week, or each month. This should only consist of bills, basic expenses like food/groceries, gas or transportation, and the minimum payments you have to make on any debt you have. Anything that is not a necessity needs to be trimmed from your budget. Then figure out your weekly or monthly income. Every dollar that you earn that is over your weekly or monthly budget can be used towards paying off debt. While there are many different ways to go about paying off debts, there are two that have proven to have a high rate of success. The “Highest Interest First” plan and the “Debt Snowball” plan. We are going to give you details on each one so you can decide what is best for you.
The “Highest Interest First” Plan
The higher the interest rate on a particular debt, the more money it will cost you in the long run. You may have two loans for similar amounts, but have wildly different minimum payments because of the interest rate on them. When pursuing the “Highest Interest First” plan, you should start by making a list of all of the different debts you have and then organize them from highest interest to lowest interest, regardless of the amount. Continue to pay the minimum payments on all debts, but then focus on putting all of your extra money towards paying off the highest interest debt. Continue to do so until that debt is paid off. Then move on to the next highest interest debt. Follow this until all of your debts are paid in full.
The “Debt Snowball” Plan
When using the “Debt Snowball” plan, you again want to make a list of all of your debts. In this case, you want to put in order all of your debts from the smallest balance to the largest balance, regardless of interest rate. Again, you want to continue to pay all of the minimum payments on all debts. With this method, start by putting all of your extra money towards paying off the smallest balance first. Once you have paid off that small balance, move on to the next one. Take all of your extra money, including the minimum payment from the balance you just paid off, and move on to the next smallest balance. When that next debt is gone you can again take all of your extra money, including the minimum payment from the first TWO balances, and move on to the next debt. The idea here is that each debt you pay off makes your payments towards the next debt a little bigger. It is like a snowball rolling downhill. It starts off small and ends up being pretty big. By the time you reach your debt with the largest balance, your payment “snowball” should be large enough that you can reduce the amount of time your pay that balance by a significant amount.
The attorneys here at Nikolaus & Hohenadel hope that one of these methods works for you when paying off debt in an effort to avoid bankruptcy. Our lawyers are happy to provide you with this type of information and more.
Contact us today to see how we can help you!