Your payment plan
Image from David Castillo
There are two common methods for paying off debt:
- Take all of your available cash and pay off the debt with the highest interest first
- Take all of your available cash and pay off your smallest debt first
The first method sets you up to pay as little as possible over the lifetime of all of your debts, whereas the second gets rid of the total number of debts you have more quickly. The method you choose should depend on your personality. If you’re disciplined enough to continue making payments on all of your debts, month in, and month out, then go with option 1. But if you want constant motivation through those little victories, go with option 2.
Regardless of which option you take, you should be as disciplined and focused as you can when it comes to making payments on your debts. One helpful method is to “pay yourself first”. When your paycheck comes in, and after all of your minimum payments have been made, apply whatever you have left to the debt account that you’ve decided to eliminate first.
Balancing debt payments with investing for the future
Image from Sujin Jetkasettakorn
When deciding how much to set aside for your monthly debt payments, you’ll need to decide if you want to use all of your money to pay off your debts, or if you’d like to invest some of it. Many financial planners suggest paying off your debts as quickly as you can, even if that means cutting into your investments. But it’s important to consider the consequences.
If you’re still young, you need to take advantage of the power of compounding. By trading and investing earlier in your life, you’re giving yourself the opportunity to grow your money like crazy. That’s why you may want to consider growing your trading account slowly and steadily, even while chipping away at your debt. Whether that means putting in a small amount into your 401(k) every month, or setting aside a few hundred dollars to put into a brokerage account, you should consider investing or trading at least a small amount on a consistent basis.
Closing thoughts
Getting into debt is easy. Getting out is hard. But it’s something you must focus on if you ever want to have a financially secure future. One of the biggest regrets of people in their 40s and 50s is getting into debt, or not paying off their large debt earlier. Don’t be regretful when you get older.
Here are a couple of general points to keep you on track:
- Never spend more than what you earn – this is the most important aspect to staying out of debt
- Try to save 10% (preferably more) of your income every month – only 57% of young professionals save part of their monthly income
- Never borrow money to pay for an asset that will only go down in value – these are called depreciating assets
- If you know you’re making a large purchase some time in the future, start saving up for it now and pay for it in cash
- Don’t think of your credit card as a loan – if possible, you should tie your credit card to your checking account and, every time you make a purchase, visualize the money you’re spending coming straight out of your checking account
In the next post, we’ll go into that last point in a little more detail. Credit cards are often a major source of debt, but used properly, they can be a great way to pay for your daily expenses while getting a little something in return. Read on.
