OBG: b&b112: Which order should you pay down your debt?
Everyone has their opinion and formula for what order to pay down debt. Google it and you’ll get a different answer every time.
The problem is, no one approaches debt paydown from both the logical and psychological standpoint. This leads to people paying down debt only to run it back up.
In today’s show, we talk about the order you should pay down your debt based on working with 100’s of clients and seeing what really works. It’s not about picking the highest interest rate or paying things down as fast as a spreadsheet tells us, it’s about how to build momentum from quick wins and find the motivation to keep it up.
By creating a debt paydown system based on the human side of finance, you’ll start to see results faster than you thought possible.
The thing with credit cards to keep in mind is, as much as possible, this is the debt that needs to get paid down the fastest…as much as possible, make sure that credit card debt gets taken care of first because it has the highest interest rates.
Do not refinance your public student loans into private student loans if you want to take advantage of that interest based repayment program, because one of the other benefits of federal student loans is that you can defer them or put it on forbearance so if you lose your job, [or] you go back to school, you actually can stop the payment for a certain period of time, and you cannot do that with private loans. With private student loans, you just have to pay them back all the time.
Mortgage interest is tax deductible. And what that means is basically whatever interest you pay comes off the top of your income. So if you pay $10,000 in interest one year, then you deduct that off of your tax return and you actually owe less in taxes.
The way to prioritize is credit cards first. Then pay off personal loans. Then pay off auto loans. Then pay off student loans. Then pay off mortgages.
Debt should always be paid down systematically and savings should always happen sporadically…The thing with savings is, yes, you should have a regular savings account and have a system for saving, but when you get extra money, put it to savings because you’ve already integrated your debt payment into your budget.
If you don’t know what’s going on with your money, then you are the one that’s getting taken advantage of.