Today I want to talk about something near and dear to my heart which is how to prioritize your debt payoff. There are many theories of how to do this but I’m going to speak from experience and practicality.
First and foremost, here are my thoughts about debt. Debt is tough. Debt costs money. Debt can be avoided. The bible, which is where I get my source of truth states in Proverbs 22:7, “The rich rule over the poor, and the borrower is slave to the lender.” I can agree with that. Whenever I’ve owed someone money, I know that they own part of my paycheck.
I’ve experienced much of my life in debt and then more recently experienced some of my life out of debt. I’ve found that I much prefer the latter but getting there and staying there takes intentionality.
The other thing I want to say about debt is that it’s not wrong. Sometimes, debt is needed. Additionally, the bible doesn’t say it’s wrong. Rather it talks about how it limits our ability to live generously.
Learning to be a wise steward of our finances is a fabulous way to bless others and care for yourself and your loved ones. The mind frame I like to use here is that God owns all the money but He generously asks me to manage 90% of a particular pot. I tithe (give 10% to my church) off the top which leaves me with 90% to manage. I work for God and I want to do a good job with the money He entrusts me with. This mindset keeps me focused on being a wise steward.
Prioritizing Your Debt Payoff
So if you do have any debt, I’d advise you to formulate a plan and focus on paying it off as soon as possible. There are many different theories and methods for paying down debt but the two most widely known methods are the Dave Ramsey debt snowball and the debt avalanche.
Whatever method you choose, it always starts with making a list of each debt including the following:
- Balance due
- Interest rate
- Minimum payment
- Amount of time it would take to pay the debt off by just paying the minimum payment
- Amount of interest you would pay in total if you just paid the minimum payment (not as important to write down but fun to know as a comparison)
In a nutshell, here is the difference between the snowball and avalanche methods…
With the debt snowball, you line up your debts from the smallest balance one to the largest balance one regardless of the interest rate. Then you begin by attacking the smallest one first. Do whatever you can to knock that baby out – sell some stuff, get a side hustle, cut your expenses – whatever just pay it off! Simultaneously, you are paying the minimum balance on all of your other debts.
Once, you’ve paid off the smallest, you snowball that minimum payment amount into the next biggest debt payment. You can see the trend here! As your snowball gets bigger you pick up speed and start to make some progress. Additionally, by the time you get to your biggest debt, your snowball should be rather large.
The snowball method works. It also gives you a psychological win by paying off some of the little ones first.
Now with the debt avalanche, you line up your debts by interest rate listing the one with the highest interest rate first. You begin attacking that one first with the same ferociousness you would on the snowball. Additionally, when this debt is paid off, you roll that minimum payment into the debt with the next biggest interest rate.
The name avalanche comes from the fact that this method will most likely end up being more mathematically beneficial since your cutting down on the amount of time you are paying high interest.
What about a Hybrid?
Well, yes, I’m glad you asked! While I followed the debt snowball method when paying down my debt, I also lucked out in that my smallest debts were my highest interest debts. Although, as I now help and coach women who are working on their finances, I find I like aspects of both of these methods and hence recommend a hybrid approach.
You can read about my suggested combo of the debt snowball and avalanche here.
How to Prioritize
For the purpose of this article, I want to talk a bit about how to prioritize debt because not all debt is created equal. Think about a 30-year fixed-rate mortgage at ~3.25%. It’s not really a “pants on fire” type of debt. Would it be nice to live in a paid-for house? Heck yes, and I hope to do it someday; however, I’m also not afraid to have a mortgage while simultaneously earning higher interest rates from investing in the market.
Sidebar: I’m still currently renting but am fairly certain a house purchase will be in my future so I have a savings account for that.
On the flip side, owing money back to payday lenders is a “pants on fire” type of debt!! Why? Because those suckers can trap you into a cycle of borrow, pay high interest, need more money, borrow, pay high interest, ad infinitum…
Here is Deanna’s suggested priority list of debt (highest priority ones first):
- Payday loans
- Money owed to the IRS
- High-interest credit cards
- Car notes
- Student loans
Did I miss any? I’m sure I did but these are the big ones and I think you get the idea.
Pants on fire
Now, I will even be so bold as to say if you have any of the first three types of debts, you should lean in hard and work to pay those off quickly. The reason #1 & #2 are high priority is that you will be paying more in interest than the actual amount you borrowed. High-interest debts are not only stifling but can and will hold you back in life. I know I used to live with high-interest rate credit card debt. I was always paying for things of the past and could not seem to get ahead.
That was until I became intense about this stuff. Once I did, I committed to sacrificing, working hard, making different choices, budgeting, learning, listening, and following advice.
You can read or watch a video about my debt payoff story here.
The reason owing the IRS is a high priority is because who wants to owe the government?! They are kind of powerful and have, um, the ability to garnish wages.
Debts #4 – #6 are less urgent but it should always be a goal to get to debt freedom. Car notes are not so horrible but let’s face it they are a normal way of life here in America. It’s sooooo easy to get a car loan and then pay it off in 4-6 years only to turn around, trade it in, and get into another one. You know that ad infinitum thing again.
I suggest once you pay off your car loan, you keep that baby for another 4 years and save up enough to buy your next car. Also, I’m a fan of buying new/used cars as they depreciate less. It’s about playing offense rather than defense.
Student loans – ugh!! This was my big one at around $40k. My interest rate wasn’t huge at 6% and if I kept paying the minimum payment it would have taken me 30ish years to pay them off. Not to mention the amount of interest I would have paid for those suckas!! Once, I got intense I paid them off in 3.5 years.
Last but not least mortgages are totally fine with me. I’m not in a position to pay cash for a house but if I was, I’d do it! However, my rules of thumb with buying houses with a mortgage are:
- Put 20% down to avoid private mortgage insurance
- Pick a house with a price that if I got a 15-year fixed-rate mortgage it would be no more than 25% of my takehome pay
- However, I might get a 30-year fixed-rate mortgage so I can earn more in the market and still pay the house off early
Okay, so wherever you are at on the spectrum of debt priority, the main goal is to get started. It always starts with a list so you know what you have to work with. Next. prioritize your debts. If you have any “pants on fire” types of debt, you know where to begin. For the rest, you can follow the snowball, avalanche, or a hybrid of the two.
You are going to need to be on a budget when paying down debt, so begin there. Here are some articles I’ve written on budgeting:
- How to Do Zero-Based Budgeting
- How to Budget with a Credit Card
- Budgeting for the future
- Using the Every Dollar App
I’m not gonna lie, this takes sacrifice and intentionality but it’s soooooo worth it. As you begin or continue you on your debt payoff journey please let me know how I can help. Accountability can be a great motivator.
Let me leave you with some final motivating quotes and if you like these, check out this article where I found them!
“Debt is like any other trap, easy enough to get into, but hard enough to get out of.”
-Henry Wheeler Shaw
“The man who never has money enough to pay his debts has too much of something else.”
-James Lendall Basford
“The only man who sticks closer to you in adversity than a friend is a creditor.”