Prioritize Paydowns

If you’re struggling with consumer debt, you need to prioritize debt repayment and come up with a plan. Trying to pay down debt without one is like going on a trip without a map. You may reach your destination eventually – but it will take longer to get there and you’ll undoubtedly get frustrated along the way.

Since creating a debt spreadsheet in Step #28 you should have a clear picture of what you’re dealing with. Do you have accounts that are past due? Make it a top priority to get these bills current. Are there any bills with exceedingly high rates? Those should be a top priority as well.

But, after the obvious, which debt should you tackle next? There’s no question that paying off your highest interest debt first makes more sense mathematically. At the end of the day, this method will always result in more money in the bank (Click here for additional reading). However, if you are the type that craves instant gratification (which could be why you’re in debt in the first place) the Snowball Method may be more psychologically rewarding. It’s up to you to decide which method makes the most sense given your own situation and level of motivation.

Here’s how they work:

Snowball Method
· Rank debts in order from the lowest balance to highest
· Make minimum payments on all your debt with the exception of the debt with the lowest balance
· Put any extra money towards the debt with the lowest balance until it has been paid in full
· Repeat the process by always applying extra money to the next debt with the lowest balance

Highest-Rate Method
· Rank debts in order from the highest interest rate to lowest
· Make minimum payments on all your debt with the exception of the debt with the highest interest rate
· Put any extra money towards the debt with the highest interest rate until it has been paid in full
· Repeat the process by always applying extra money to the next debt with the highest rate

How Long Will it Take?
http://www.bankrate.com/brm/calculators/debt-management.asp
http://www.bankrate.com/brm/calculators/creditcards/debt_payoff_calculator.asp

Assignment: Decide which debt repayment method to follow. Organize your debt spreadsheet according to the debt repayment plan you will follow, and calculate how long it will take to pay it off.

Web Resources: http://www.latimes.com/business/investing/la-credit-story12,1,246413.story

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This is where I am lost on which is the best thing to do. I have an auto loan that is taking $400 a month - I have considered putting that as my priority, because if I do that, I can get it paid off in 10 months (vs. 16 months), then I would have that much more to put towards credit cards... or should I put a credit cards first? I keep going back & forth & this is why I get very discouraged... if I just knew where to start, I know I could do great!

It's hard to know without knowing the terms/rates on your debts. In general, I'd tackle the highest interest rate loans first.

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I also have a great debt-reduction/snowball excel spreadsheet if anyone is interested. Just PM me your email address and I will be happy to send it to you. Or if anyone can explain to me how to attach an excel document, I will attach it here.
Shandra

We just paid off all our credit cards and the only debt we have left is our home equity loan (line of credit), car loan, and house loan.

I know that the home equity loan needs to be next, then the car (I'll need to call on that to make sure that there isn't a fee for paying it off early), and then the house.
One of my dreams... now a goal is to pay off the house in 10-15 years instead of 30. We are already ahead of schedule but once we get our debt paid off we will be doing better.

I have also thought that once or credit line is paid off to put the rest of the car on there because the interest would be a lot lower but I can't do that now because the balance is too high. I'm going to think more on it while I work with the plan that I have come up with.

Congrats on paying off those loans! That's got to be a great feeling!

I know that a lot of people get gung-ho when paying off debt, which is great - but I think you should also be focused on building wealth as well. Before you decide to pay down your mortgage, be sure you have the following:

A healthy retirement fund
6-12 months of living expenses in reserve
Have adequate life, disability insurance

Still, after that, I'd investigage other options that will payout at a higher interest rate than paying down your mortgage. I agree that there is something psychologically appealing about owning your own home outright, but you can also get that same sense of security by building up a healthy investment portfolio, which could boost your net worth even more in the long run. Here is a link to where I discussed this yesterday:
Dave Ramsey on paying off mortgage...

For example, would you rather own a $200,000 home outright or have $250,000 in investments? This could be a typical scenario assuming you have a low-interest mortgage and invest in funds that yield a few percentage points more. If you choose the latter option, you can always decide to liquidate and pay off your house if you choose to do so - plus have extra left over as well. I think the second option definitely leaves you with more options, flexibility, and cash.

But that's just my $.02. In the end, each person has to choose whatever option he or she feels most comfortable with. I would just encourage you to carefully consider the math of each option before embarking on paying off your mortgage too soon.

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Thanks so much for the advice. I am pretty gung ho right now and I forgot about a few of my options. We doo need to boost our savings account and start a retirement account. Then after that we will see what we have left.

And you are right! Paying off those cards sure did feel great!

I would start that retirement account now. Even with a down market and only being able to invest 6% our 401K is growing fast because we have employer matching and profit share. So It gets thousands of dollars that we would not receive at all if it wasn't for putting a little away for retirement.

OK So my plan For us we are using the snowball method as it also makes since with the interest rates and paying off before the promo period is over. Our lowest card has a balence under 300 so paying that off should be a snap. The AE CC is our next challenge. Finish that and its onto the the Auto loan (3 years to go with minimum payments.). Then we can take what we were spending on debt and finally build a proper emergency fund and double our retirement savings. Before working on the last two debts. The Student loan and the Morgage. Putting those off because they are both loans with Tax advantages.

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SOunds like a good plan, Ember. Just make sure you have your emergency fund/retirement/savings in place before you worry about paying down the mortgage.

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I am new to the forum and I was wondering if there is a list that has all the steps you have all went through already? One spot that I could see where you all are and where you have came from.