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You entered the new year with a big resolution: to pay off your debts. But when you see piles of paper bills and email notifications of when payments are due, you wonder how you can reduce that debt.
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We didn’t get into debt overnight, and we didn’t get out of debt overnight. But getting there requires planning on two fronts. That means prioritizing how to pay back what you owe and avoid creating more debt, financial experts say.
Fred Wincher, co-founder, president and CEO of financial broker MaxCash, said, “Creating a list of all your liabilities and highlighting their interest rates is the first step to prioritizing. One step: “Debt with late fees and penalties can grow quickly, so prioritize it.”
“The first step in getting out of debt is to stop getting in more debt,” says Dr. Jay Zigmont, CFP and founder of Childfree Wealth. “That means no new debt and locking your credit card so you can’t use it.”
Let’s take a closer look at how to prioritize debt.
Necessities
Sean Fox is President of Debt Solutions at Achieve, a California-based digital personal finance company. He advised starting with the things you need to pay each month, like shelter, food, and utilities.
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“This includes minimum payments for secured debt such as homes and cars,” he said. “Of the two, please pay for housing first. If you fail to pay there, you risk losing your home and place to live.
If you’re having trouble paying your housing bills, Fox suggested contacting a mortgage servicer. Also, many states, counties, and cities have rental assistance programs.
“Similarly, if you’re having trouble paying your car loan, contact your servicer right away,” Fox said. “They may be willing to build another payment plan.”
student loan
According to Fox, this should be the next debt to attack.
“Pay your student loan debt or save,” he said. “These payments have been suspended, but there’s no guarantee they’ll be fully forgiven. And bankruptcy won’t discharge your student loan debt, so you can either pay the debt incurred or at least save regularly.” , better make sure you can pay it back when it’s due. Worst case? Your loan has been forgiven and your savings have increased.”
credit cards and other loans
“While trying to minimize debt, you should focus on paying off high-interest debt first, such as credit card debt,” Wincher said. Paying off your card debt can help you save a lot of interest costs over time.Credit card interest rates are often higher than car and other loan rates much higher.
“Plus, credit card balances are often smaller than large loans, so you can pay them off quickly. To avoid late fees and penalties, it’s important to pay off all your bills.
Debt repayment strategy
There are two common ways people pay off debt: snowball and avalanche.
“Snowballing involves paying a monthly minimum on all debts and using the extra money to pay the smallest debts. says Mr. “Once you pay off that debt, you move on to the next one, but the monthly payment is one less and it starts snowballing. It tends to help people keep paying off their debts.
“With the avalanche method, you pay off the debt with the highest interest rate first. Credit cards may have the highest interest rate, followed by personal loans, student loans, and car loans. Although Avalanche is mathematically correct, , it may take some time to pay off the highest interest debt.”
let’s start
Julian Gumrak-Smith, founder of the Investing Academy for Women, says the key is paying off your first balance and feeling accomplished.
“So many people are stuck on the first step of paying off debt,” she said. “They fall into analysis paralysis. Which debt should be paid off first? What is the interest rate on this loan? How much is this credit on her card? After all, it’s about doing nothing.” .
“Let’s keep it simple. Start with the smallest debt you have and pay it off. Then the next and the next. This builds momentum. Keep moving.So pay off your debt, keep it simple and get started.Starting is the hardest part.”
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This article originally appeared on GOBankingRates.com: How to Prioritize Different Debt Payments This Year
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