I hit on the main ways of diagnosing your financial health in this past post. I'm going to use Wednesdays to go further in depth on each point since I truly believe that financial health leads to less stress and happier lives.
I have already covered the first three points - Spend Less Than You Earn (you can use free budget software), start an Emergency Fund, and review Retirement Savings. The fourth point was to take a look at your debt. This means actually making a list of your debts and coming up with an agressive plan of attack.
Make a List of Your Debts
There are a variety of debt elimination methods, but I'd start with prioritizing your list of debts. Place your high interest debts like credit cards or payday loans at the top and your lower interest debts like car loans, mortgages, and student loans at the bottom. I'd go even further and list the high interest debts from least to most actual debt and do the same for the lower interest ones as well. This completed list will show you which debt to attack first.
As a side note, high interest debt is so detrimental to your overall financial health, I'd rate its importance above most retirement savings. If I had debt that was at 10% or more, I'd keep a two month emergency fund, only contribute the minimum needed to get my full employer match on my 401k, and then I'd take care of the debt.
Attack the Debts in Order
In order to pay down debt, you will need extra money every month- you'll need to consistently spend less than you earn. While paying the minimums on all debts, your extra money should be applied to the first debt on the list mentioned above until it's completely wiped out. After paying off one debt, put that entire amount towards the next debt on the list. Repeat this process until you are completely debt free.
Freedom from high interest debt will give you options and lighten your mental load significantly. Freedom from all debt will give you wings...so I've heard. :-)
Our Debt Situation
As I write this post, my husband and I have about $10,000 left on a 4.6% interest car loan we took out in 2008 and $73,000 left on our 5.375% interest mortgage. Since finally coming to my senses at the beginning of this year, we are hitting the car loan pretty hard whenever possible. We've been overpaying our mortgage by $160 a month since it started in 2007. We're currently on track to have the car paid off sometime in 2011 and our home paid off by the end of 2017. I cannot wait for the feeling and options that come with complete debt freedom.
How about you? What kind of debts are you trying to eradicate? Do you have any suggestions for us?
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4 weeks ago
I will never forget how wonderful I felt when my student loans were paid off when I turned 30. Even though my loan amount was minimal at that point, it was so liberating.
ReplyDeleteWe are in a cruddy lease right now on my husband's car because his former company covered it. But when he changed jobs, the car came with him, along with the lease payment. I hate that lease and can't wait for it to be up. Next car will be used and paid with cash. (hopefully)
Just a thought. I don't know your tax rate or how much you are actually paying in interest every month on your home, but if you consider the tax benefit of your mortgage, is your mortgage actually cheaper debt than your car? (Even though the interest rate is higher.) If you didn't have the car loan, I would be all for paying down that mortgage. But, does it make sense to instead put all your extra money into the car debt? Obviously, you have these answers better than anyone, I was just commenting since you asked if anyone had suggestions... Have a great day!
I agree, the only addition I'd have to add in would be to think about possible future debt and plan for those as well to help avoid actual debt when the time comes. For me this would be planning for the untimely death of my car or what it might cost to go back to PhD school which I'm in the process of applying for, etc. Other than that, you have the right plan, pay extra for the debts with the highest interest and get rid of them! Then just keep on snowballing till they're all paid off and you'll realize how much extra money you really have (and just saved paying everything off). It's a great thing.
ReplyDeleteLooks like you have plenty of cash to pay off the car. Just pay if off now and then build up your cash reserves over the next few months to whatever makes you feel comfortable (this is assuming your jobs are stable). Every extra month you keep that lease you are throwing money away.
ReplyDeleteJust 3 debts now.
ReplyDeleteCondo
Car
Student Loan
I'll attack as much as I can. Don't expect to be completely free for another 15 years or som unless I hit the lottery. :-) But I guess I need to buy a ticket for that to happen.
We're working on our mortgage, and I can't wait 'til that's gone! One thing I found helpful back when I was getting out of credit card debt was actually going through and reading the old statements to see some of what I bought. Nothing like seeing line after line of crap I didn't even have anymore to keep me on track.
ReplyDeleteKris, our standard deduction is larger than our mortgage interest (about $2500 - $3000 a year), so the home loan is probably a worse rate. I just hate the depreciating car debt worse...
ReplyDeleteBut, I also hate the mortgage, which is why I've overpaid that since the beginning.
I know, illogical, but, well, there you go.
Thanks so much for your suggestion though! Sorry about the car lease you got saddled with. :-(
Amanda, I can totally see where you are coming from, but that cash isn’t very available…I should have broken down our cash before to show what’s going on. Here’s the approximate breakdown of our cash as it stands today:
ReplyDeleteBrick and mortar bank checking - $1000 padding
Brick and mortar bank necessary savings minimum - $500
Emergency Fund - $10,000
ING Checking - $2500 ($1000 padding plus money for the credit card statements that end mid-month)
Savings for Grad School Payment in June - $2000
Vacation Account - $3600 ($1600 of which will be going away this month for our cruise tickets)
Taxes and Insurance - $3000 (property taxes will be due in November and be about $2300 and homeowner’s isn’t due until April 2011 now for about $800…we will not be contributing anymore to this account this year)
Auto and Home Maintenance - $1000
Roth IRA and Stock Extra - $1000 (which is going into the stock market tomorrow)
Husband’s Fun Money - $550 ($500 padding plus fun money)
My Fun Money - $850 ($500 padding plus fun money)
That’s how we have about $26,000 in cash right now. All I can see extra for debt is the $10,000 emergency fund and $2000 from the vacation account. Since everybody is already uneasy about our emergency fund and I rather not use vacation money, that’s why we haven’t thrown anything else at the car loan yet. But, we will have $400 extra a month to contribute since the tax account is already done. That should help. :-)
Thanks for paying attention though…I’ll probably do a whole detailed breakdown in a future post for everybody to see since it does look pretty silly on paper to say we have $26,000 and a $9,000 loan. Nice catch!
Jackie, you are a stronger woman than me...I'm not looking at any statement older than two years. I'd cry.
ReplyDeleteI once had car debt of $10k or so... wasn't the greatest idea ;) I am currently debt free, but I will soon have plenty of mortgage debt on my neck. At current interest rates it is not such a big deal (better than renting), but we will see in the future. Such is the price to pay for home ownership!
ReplyDeleteKevin, you're right about the costs of home ownership, but I agree with you, it's worth it. :-)
ReplyDelete