High interest debt adversely affects your financial well-being.
It’s constantly pulling you down, making it difficult for you to get ahead. Even knowing all this, people still neglect to do what needs to be done to eliminate high-interest debt.
Essentially, when you’re saving money, you should be using some of that to make investments or putting it into high-interest bearing savings accounts to make your money work for you. You cannot get ahead with this method of saving if you owe high-interest debt because it takes more than what you can reap from investing.
Consider credit cards as an example. Some people save money in high-interest savings accounts whilst making only minimum payments on their high-interest credit cards. The goal here should be to pay off that high-interest debt as quickly as possible using your savings. The faster you accomplish this, the faster you free yourself from high-interest debt.
Pay off high interest debt first
Before you consider investing or saving money, it’s important to pay off high-interest debt. How can do you that?
How to pay off debt: Two strategies
- Start with the highest interest rate credit card or loan first. Once that one is paid off, you take them one at a time, paying them off according to the highest interest to the lowest respectively. This is how you pay minimal interest instead of interest for years on credit.
- Pay debt in order of its total balance. Start with your smallest debt. After that is paid off go to the next smallest and the next until you pay off the final largest credit card or loan. This way, if your largest debt is too much to pay off, you can focus on it alone using money you put back. This strategy is known to motivate people with high-interest debt to pay it off and maintain it.
Technically, paying off the highest interest loans/credit cards first is the best strategy, but if eliminating debt by balance keeps you motivated, it’s the better solution. The goal is to pay them off as quickly as possible until you are debt-free from loans and credit cards.
What to do with low-interest debt: Mortgages and loans
Not all loans are high-interest. Mortgages and some loans are usually low-interest loans. After paying off your high-interest loans, you may consider making additional payments on your low-interest loans.
It depends on whether investing (for example, in the stock market) at the time will reap more financial benefits than paying extra on your mortgage or home loan. This is a personal decision – you know you will be reducing your debt if you make higher payments on your mortgage and pay it off sooner, and the stock market doesn’t offer any guarantees. No one knows which direction the stock market will go on any given day.
There are several strategies out there to help different people eliminate high-interest debt. Always seek professional financial advice to help you make the best decision for your needs. The main thing to take away from this information is to focus on getting those high-interest credit cards and loans paid off as quickly as possible!
This article has been supplied by The Pay Calculator. This information is not intended as advice and does not take into account your personal circumstances. Always seek professional financial advice.