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January 31, 2017
It’s a new year and with that typically comes resolutions to improve our lives. If getting your finances in order is on your list of “to-do”s, then you’ll want to focus on the basics of reducing or eliminating debt and begin saving for your future. But, how do you know what to tackle first? Use the four steps below to rank your loan obligations and start yourself on the road to living without debt.
First things first – you must commit to no new debt. Live within your means.
Next, rank your debts using these four steps:
- Start Small. If you have small debts that will be quick to pay off, you should list those first – no matter the balance or APR. Checking a loan obligation off your list early will eliminate monthly payments and give you a sense of accomplishment, which can help keep you committed to your goal of a debt-free life.
- Know Your Rates. Rank your debts in order of their interest rates, highest to lowest. Using the interest rates, prioritize the order in which you should pay them off. Sort your obligations by variable and fixed rates. Variable rates should be given a greater priority than fixed, in most cases.
- Consider the Term. Rank open-ended obligations above fixed-term loans. For example, an auto loan typically has a fixed term. If you make your scheduled payment, you will pay off the loan within the prescribed timeframe. A credit card, however, has no term. Your payment is a percentage of your balance. Therefore, making only the minimum payment could cost you years of interest payments.
- Tax Benefits at the Bottom. Typically, loans such as mortgages, home equity or student loans may offer a tax benefit. Paying those down should be a lower priority than paying off debts like credit cards or car loans. Put those toward the bottom of the list.
Now that you have your prioritized list, start at the top. The first obligation on your list should receive your maximum debt payment. Pay the minimums on all your loans below number one. Once you’ve paid off your first obligation, congratulate yourself and move to the next item on your list. Continue paying your maximum debt payment to your top loan and work your way down the list until you reach your first mortgage, if applicable.
Now the hard part – continue living within your budget. Those debt payments just became your savings deposits! Start with employer-sponsored savings, such as a 401k if you have that option. Then move on to IRAs, Certificates and Money Market accounts.
Saving money is often viewed as a luxury for those with “extra” money; however, the consistency of putting away money is how smart investors grow their money effortlessly. Stay focused and remain committed. You can achieve a healthy financial future. As always, please feel free to reach out to 1st United if you have questions or need additional guidance.