Which debt to tackle first?

Question

Our family income has recently increased and we can now afford to allocate an additional $1000 monthly to paying off some debt and/ or saving. We have a maxed out credit card ($2000) that we basically ignore (!) other than throwing minimum payments at, a personal loan (7 years) of $5000 and an 85K mortgage. We have no arrears or other financial woes but also no significant savings.
How would this money work best for us?

Answer 1

Paying off the high interest credit card first would be a good start, then tackle the the personal loan , i wouldn't worry so much about the mortgage as the interest is tax deductible.

Answer 2

Okay -
Pay the minimum on the mortgage. You're getting a tax deduction for that.

Pay yourself first. Allocate some of the additional funds you have toward a savings account. You don't want to feel like you're not moving forward.

On the personal loan and credit card -
From a time value of money prespective you should pay the one with the highest interest rate first. But you also need to lift your level of accomplishment and get yourself feeling like your making progress.

I would suggest the following -
Mail, or put in the pile of your bills a statement that says you owe me 250. (That is the amount to put into the savings). Work on the credit card. Make the minimum payment on the personal loan and allocate the additional 750 to the credit card.

Keep your credit card for emergency purposes only.

Make sure you treat yourself once in a while. You don't need to spend a million dollars to have a good time with some of the extra money. Maybe go out to eat at a moderately priced restaurant once a month. PAY CASH. If you don't have the cash don't go.

Once the debt starts to go away, and your savings builds you'll feel much better about yourself and your situation.

The real trick is to make sure you get out and stay out. Don't fall back into the trap. It's kind of analogous to going on a diet. You can lose the weight but if you don't change the lifestyle you'll go right back to where you started.

Answer 3

From a strictly dollars and cents point of view, you should definitely order your debt from the highest to the lowest interest rate you're being charged. Pay them off in that order and you will minimize the amount of interest you have to pay.

The next question is whether you should start saving regularly before paying off debt and, if so, when to begin. There is no one correct answer to this question. The risk in not establishing an emergency fund is that you might have some unexpected expenses and need to charge them on a high interest credit card instead of taking the money from the emergency fund. But you appear to have only $7,000 of debt outside of your mortgage. If you really can pay an additional $1,000 per month toward debt reduction, you'll have eliminated the credit card debt and personal loan in only seven months. I would say go ahead and do so, and only then establish an emergency fund of 3-6 months of living expenses.

So, fairly soon you will have only mortgage debt and an adequate emergency fund. At that point you have to decide whether to pay off your mortgage early, or use the extra money for investing. At today's interest rates, it's likely that you could do better over the long run by investing in the stock market and not trying to pay off the mortgage early. But of course, stock market returns aren't guaranteed, so some people feel more comfortable eliminating the mortage. Either way, you will be making good progress towards financial independence.

Answer 4

Between the credit card and the personal loan, pick the one with the highest interest rate and pay the $1000 towards it until it's paid off while continuing to make minimum payments on the other. Then use the $1000 plus the minimum payment you were paying towards the second one and then get it paid off.

Then, before paying extra on the mortgage, make sure you have at least 6 months of living expenses saved in an emergency fund. This could be in a savings account.

Then, if your not already, start funding your retirement.

After all other debts are paid, you have an emergency fund and you are maxing out retirement contributions it's then time to look at paying extra towards the mortgage.

Answer 5

You need to pay both the credit card and loan. You just cant ignore a debt. Every month you are late will lower your credit score and cost you alot more money later on. Pay off the credit card completely and after that, make double the minimum payments on your loan and I would also suggest adding an extra few hundred dollars to the principle of the mortgage each month. You will actually save a good amount of cash in the long run.

Answer 6

There are different theories on how to tackle debt.
First make a list of all your debts, who you owe, how much and what interest rate are you paying.
Now one theory is that you tackle your smallest debt first, paying only minimum on all else, until that debt is paid. Than you would move on to next smallest debt and do the same, and so on.
The reasoning behind this method is a good one. Most folks will get discouraged after a while and may give up if they do not see tangible rewards for their efforts. When you have successfully eliminated that one debt it gives you a sense of victory, success, thereby giving you incentive to continue on.
Another theory is to tackle the debt with the highest interest rate first. This also has merit as you are making the biggest dent in your overall debt/ finance picture. In this method you are saving yourself the most in interest payments so really you are making yourself more money, in the long run, by not having to shell it out to some bank.
I would say that if you tend to be easily disheartened, then you should use the first method. If, however, you can be disciplined, with the long-term goal in mind at all times, then go for the whole match at once. It may take longer to see tangible results, however, it is worth it!
Something I would add. When you do put one debt in the grave, try to resist temptation. DO NOT go out and make the situation worse by acquiring more debt. just because you have eliminated one and now have extra money to spend. Either put that in saving, or perhaps even better, put the extra money back into the debt elimination; now the remaining debt will go even faster!
Then when all debt is gone, put that money into savings, maybe multiple accounts, one for rainy day things, one for vacation, one for those things that are not emergencies, but still needed, like replacing that old washer before it breaks down.
An additional tidbit; after all your consumer debt is eliminated you could attack your mortgage. Every penny that you add to your mortgage payment, in addition to the required amount, goes directly to the principal. A friend told me recently if you take the amount of one monthly payment, divide that by 12, then add that amount to each payment you make, it would take 13 years off from a 30 year mortgage! I have not verified that, however, I would not be surprised. If that sounds too complicated, then add 10 percent to each payment is you can, then it will go even quicker!
Hope this helps!

Answer 7

Definitely set up a savings of 1/3-1/2.

Pay off the highest interest rate first.
A card maxed at 2K? Not very much, but if you have been paying min, interest is killing you. Pay it off. $500.00 per month is 4 months or less.

The personal loan 7K, begin paying additional principal. That will save interest. After paying off the card, increase principal payments on this.
Interest saved is money earned.

If your morgtage is fairly old, you have already paid most of the interest in the early years. Most of your payments now apply to principle. You need to look at the amortization on the balance of the note and determine the balance of interest to be paid.
You may find that the remaining interest calculates to a very low percentage on the balance, and savings or investment will bring a higher return than the interest savings on the note.
At the very least it may be a washout, so savings is the way to go, for emergencies.

Answer 8

Put $500 a month in savings. Put $250 each on the credit card and loan.

When you pay off these two bills pay an extra $400 a month on principle on your mortgage. Allot $100 for family treats.Continue saving $500 a month until you have $10,000 for emergencies.

Once you emergency fund is built you can start saving for retirement or you can save for a large purchase.

Answer 9

I would start off paying off as much as you can on the credit card as they usually have interest rates over 10%. Often much higher than that. But don't pay it off and then cancel it. This will hurt your credit score. I don't know about you, but I'm not one of those people who like having to pay money to spend my own money. Which is what interest is. Then you could pay off the personal loan. Also one option you colud look into is reamiturization of your home loan. Paying a chunk of it off and then having the payment size lowered. Then you could make the larger payment you were allready paying and pay it off sooner.

Answer 10

List all of your debts. Arrange them smallest to largest. Tackle the smallest ones and pay them off, pay the minimum payment to the rest of the debts. Cross them out and move down the list. You will be amazed at how fast you can clean up your debts. Don't even think of shopping or going on a vacation with the money. Eat at home and be really thrifty until you get your debts cleared up. You will sleep so good once you have worked down the list and see results.