A Debtor's Guide to Being Debt-Free

How to achieve financial freedom one debt or loan at a time.

Three Tried and True Tactics to Pay off Debts

There are good ways to tackle debt, and bad ways (chiefly, ignoring it). Here are some of the best tactics for paying back loans quickly.

There are so many reasons to take on debt these days. Food, housing, transportation, entertainment — all reasons for debt on the average citizen’s credit card, or balance sheet.

Whether you’re talking about recurring car payments, a 30-year fixed mortgage, student loans, or credit card debt that keeps ratcheting up, here are some great tips for keeping your debt in check.

#1 Pay Down the Highest Interest Debt First

This one may sound like a no-brainer, and that’s because it is. If you’re carrying a 14% APR or higher rate on your credit card, for the love of God, pay that debt down as fast as possible. Yesterday! You’re giving the credit card company money, probably because you got a card when you were younger expecting to fly Delta your whole life. While it’s difficult to imagine being in your 30s at a regular job with two kids, that $150 a year AmEx credit card that helped get you seat upgrades throughout your time in the military is now just a giant financial millstone sucking down $2k-$3k per year (or more) in fees for no tangible benefits. Pay it down and make sure you settle your monthly balance in the future.

Some credit card companies will let you put your debt on a payment plan or refinance to bring the interest down a bit. Explore all these options as you pay down the balance. Remember, credit cards are a great way to build credit and to protect yourself against fraud, but you need to make sure you can pay off the balance each month.

If that means saving a little less for retirement or paying down your mortgage a little slower, so be it. This should be your number one priority.

Whatever it takes!!

#2 Work Small to Big

This might feel counterintuitive. Shouldn’t you pay off the bigger debts / loans first, and the smaller ones second?

Well, depending on other considerations such as the aforementioned Annual Percentage Rate (APR) in the case of credit cards and interest rates in the case of a mortgage, and urgency of payments, you should consider tackling smaller loans first. There are two main reasons behind this. First, the more debts you have, the harder it is to keep track of them all. You don’t want to miss payments. So managing those debts or loans is a good way to ensure you don’t lose track of anything, which might negatively impact your credit score.

There’s a simpler reason you want to knock out smaller loans, first. Psychologically it’s a big bump to know you handled a loan. It took me 4 years to pay off my first car. And at the end of it, I felt that I’d accomplished something real. Paying off loans, fulfilling a debt you have to a lending institution, that’s a nice feeling. It’ll help you tackle other loans you’ve taken on over the years.

Work small to big whenever possible!

Bigger isn’t always better. Of course, it is in a knife fight.

#3 Balance Repayment with Retirement

This one’s also a little counterintuitive. If you have a 3% interest rate on your home mortgage — not inconceivable given the ludicrously low rates during the COVID pandemic — it might make more sense for you to put $500 extra per month into retirement savings that’ll likely net a 5% to 8% return than to pay down your mortgage principal early. Calculate the numbers and figure out what the ideal split is.

It’s a little bit confusing to realize that the system doesn’t incentivize being debt-free. Even $100 or $200 per month off your mortgage principle could save you tens of thousands of dollars and years off a 30-year mortgage. And most people would rather pay that off fast, to own their home outright. But when you consider that (1) the value of money decreases over time due to inflation and (2) the rate of return for most retirement funds greatly outpaces inflation, that adds up to the unavoidable conclusion that paying for your house too quickly means losing money in the long run.

Welcome to adulthood.


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