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3 Ways to Prioritize Your Debt

 

Cut your spending by $6,000 without giving up the fun and without a complicated budget.

Break the paycheck-to-paycheck cycle, find the money to pay back your loans and finally build your savings.

by Rob Bertman, CFA, CFP® in Debt
April 13, 2016

Summary

Debt is a serious issue for a lot of us today. In 2015, the total credit card debt, auto loans, and student loans that we owe together is $3 trillion in the US.  It’s hard to comprehend that trillion number, so here’s an example of how massive that is.

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You would have to spend $1,000,000 per day every day for 2,737 years to get to $1,000,000,000,000. That’s how massive that number is.

On a personal level, debt is a burden for a lot of us. It gets in the way of our lives. It’s the #1 source of financial stress.

But, it doesn’t have to be that way.  There is a way to make progress and get out of it.

It starts by prioritizing that first piece of debt to pay off, and here are 3 ways you can prioritize paying off debt:

  • Highest interest rate first – If you’re a numbers person, it makes sense to prioritize your debt by interest rate. Start by listing your debt in order of highest interest rate to lowest interest rate, and focus on eliminating the highest interest rate credit card first.
  • Lowest dollar amount first – If you feel great when you cross off an item on a list, then organize your debt by the dollar amount that you owe. The smallest amount is the #1 priority to pay back. This debt can be paid off faster than the others, and there will be a small victory to prove it can be done.
  • Highest stress debt first – Debt can be very emotional, and a person may have that one piece of debt that really stresses them out. That debt should be prioritized to pay back first. When it’s paid back, the emotional burden is lifted.

You get to choose how you want to prioritize your debt. There’s going to be one that’s right for you, and only you can decide which method that is. Making the choice is going to empower you to take action and pay off that first debt.

I’m providing a worksheet to help you list out and prioritize your debt. Download it here.

Once you go through this exercise and figure out how you want to prioritize your debt, get to work on paying back just the first piece of debt. You’re going to feel relief as you make that progress.

Please connect with me by clicking on one of the social media links. Let me know your progress, and let me know which method works best for you.  I’m very excited for you to make progress and to hear about it.

 

Download your free debt prioritization worksheet here.

Debt quote

Transcript

Debt is a serious issue for a lot of us today. In fact, I was looking at the 2015 statistics for the US and when you add up all the credit card debt, auto loans, and student loans that we owe together, it comes out to $3 trillion.  This trillion number gets thrown around a lot so I want to put it in perspective for you so that you can comprehend just how massive this number really is.

Let’s say that you were born 2,000 years ago, and you spent $1M a day, every day for 2,000 years. That’s an average of $365.25M per year for 2,000 years. That amount of spending still doesn’t get you up to ¾ of $1T. In fact, you’d have to live another 737 years spending $1M day, every day to reach that trillion dollar mark.  That’s how massive that number is.

Now let’s bring it down to a personal level.

Debt is a burden for a lot of us. It gets in the way of our life.  It gets in the way of people spending money on the things they truly care about.  It can come between friends. It can come between families. It can break up marriages.  It’s the #1 source of financial stress in our lives. At times, it can feel so overwhelming like there’s no way out. Like there’s no escape. That it just is what it is, and we have to deal with it.

But, it doesn’t have to be that way.  There is a way to make progress and get out of it.

It starts by prioritizing that first piece of debt to pay off. Though, there are different methods to prioritize paying off debt, there is no method that’s right for everybody.  But, there’s a method that’s right for you.

I’m going to share 3 ways to prioritize paying off debt and you can choose which one resonates most with you. Making a choice that feels right to you makes it personal and can feel empowering.  That means you’re more likely to take the actions necessary to pay off that first piece of debt.

Here are the 3 methods to prioritize paying off debt:

Highest interest rate first

If you’re a numbers person, it makes sense to prioritize your debt by interest rate. Start by listing your debt in order of highest interest rate to lowest interest rate. For example, let’s say a person has a 12% rate on a credit card bill, 8% rate on student loans, and 5% on a car loan. In this case that 12% credit card debt is the one to focus on paying off first.  Do what has to be done to service the other debt, but focus on eliminating the highest interest rate credit card first.

Lowest dollar amount first

If you’re one of those people who feels great getting a small victory or crossing off an item, who feels like that is what you need to gain momentum, like you can do anything, then organize your debt by the dollar amount that you owe.  So for example, let’s say there is a $2,000 balance on a credit card, a $10,000 auto loan, and $20,000 of student debt. The $2,000 credit card debt (the smallest amount) is the #1 priority to pay back.  This debt can be paid off faster than the others, and there will be a small victory to prove it can be done. You’ll get that wind in your sails, and you’ll be moving along.

Highest stress debt

Debt can be very emotional, and someone may have that one piece of debt that really stresses them out. Maybe it reminds them of something that they carelessly spent money on that they regret. When they get that statement in the mail or when they get that email saying that the statement is ready, they just don’t want to open it. It’s the debt that is so burdensome, that they look away from it. Because that debt carries the most stress with it, that should be prioritized to pay back first. When it’s paid back, the emotional burden is lifted.

To recap, the 3 ways to prioritize debt are the following:

  • Highest interest rate debt first
  • Smallest dollar amount first
  • Highest stress debt first

Now again, you get to choose how you want to prioritize your debt. There’s going to be one that’s right for you, and only you can decide which method that is. Making the choice is going to empower you to take action, to pay off that first debt. Once you do that, you’re going to start seeing the momentum, and you’re going to start moving in the right direction and feel like you can actually do this. And you can! I’ve seen it happen.

To help you navigate this exercise, I’m providing you with a worksheet.  When you click on the link below, you can download a spreadsheet that will help you list out and prioritize your debt.

Get your debt prioritization worksheet here.

Once you go through this exercise and figure out how you want to prioritize your debt, get to work on paying back just the first piece of debt. You’re going to feel relief as you make that progress.  It’s all about taking that first step, but you have to do it in a way that’s meaningful to you.

As always, if you have any questions, or any comments, feel free to connect with me by clicking on one of the social media links, and I look forward to staying in touch. Let me know your progress, and let me know which one works best for you.  I’m very excited for you to make progress and to hear about it.

You can do it!

Thanks so much. We’ll talk to you soon.

 

Cut your spending by $6,000 without giving up the fun and without a complicated budget.

Break the paycheck-to-paycheck cycle, find the money to pay back your loans and finally build your savings.