How To Prioritize Debt Payoff Against Your Other Priorities

Whether it’s student loans or credit cards, it’s tempting to want to make paying off debt your top priority, but should it be? In some situations, other goals might come first. Here are some questions to ask yourself: 

Am I able to pay essential expenses? 

If you’re in a really tight financial situation, make sure you can pay your rent/mortgage, make your car payment, keep food on the table and the lights on even if that means falling behind on credit card bills. Instead, see if you can negotiate those debt payments, work with a credit counseling service, and possibly consider bankruptcy protection.  

Do I have adequate emergency savings? 

 You want to be able to pay your essential expenses in the future even if your income is reduced by a job loss. That’s why financial planners generally recommend your first savings goal should be to build up an emergency fund that covers at least 3-6 months of necessities.  

Am I contributing enough to my retirement plan to get the full match? 

If not, don’t leave that free money on the table! Even paying down high-interest debt can’t compete with a guaranteed 50-100% return from getting your employer’s match.  

What’s the interest rate on the debt? 

 If the interest rate is above 6% (like most unsecured consumer debt such as credit cards), you’re probably better off paying down the debt before saving or investing for any other goals (except the above) because there’s a good chance you’ll save more in interest by paying down the debt than you’d earn by saving or investing that money. If the interest rate is below 4% (like a lot of secured debt, such as mortgages and car loans), you are probably better off investing extra money. That’s what’s called “good debt” because the interest rate is lower than what you are likely to earn on your investments in the long term. If the interest rate is between 4-6% (like a lot of student loans), you can go either way.   

Once you’ve decided to prioritize paying down your debt, pay it off fastest by putting any extra payments towards the highest interest debts first. As each balance is paid off, you would then put those payments towards the remaining debt with the highest interest rate. You can use our Debt Blaster calculator to keep you motivated by seeing how quickly you can pay the debt off and how much interest you will save with this strategy.  

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