How to Prioritize Debt Payments

priortize debtOne of the biggest questions out there is how does one prioritize debt payments. Should I pay my student loans off first or my credit card? Should I be simultaneously putting money aside towards my savings with a 401k or Roth IRA? These are all great questions to ask, and the answers are crucial to anyone’s financial stability and future.

A couple weeks ago I saw a title that said, “US Treasury Says It Can’t Prioritize Debt Payments”. It was a misleading title because the discussion was whether debt payments would be prioritized or if we’d default on our loans if the credit limit wasn’t raised. The truth is that the treasury would end up prioritizing and first paying all bondholders (our nations debt that includes interest). If you let your mind wander with me a bit and think about a nation as big as ours not paying it’s debt. What would the credit holders do? How would the world react? If it helps, think about your own debt and what would happen if you stopped paying. It’s catastrophic, to say the least. I’d venture to say a countries debt defaulting would be like a tsunami on top of hurricanes. It’s not supposed to happen.

I’m not smart enough to solve our nations debt and how to prioritize the payments. I’d probably suggest to stop spending so much. Raising a debt limit is ludicrous. Any financial adviser will tell you to not spend more than you bring in. Other than that, I don’t know. So I can’t solve our nations debt problem but I can tell you how I budgeted to prioritize my debt and what advice I try to follow.

Here is a list of different types of debt, loans, payments, etc…

  • Student Loan
  • Car Loan
  • Taxes
  • Mortgage
  • Property Taxes
  • Home Owners Insurance
  • Medical Bills
  • Credit Cards

It’s also important to know the difference between Secured Debt and Unsecured Debt.

Secured Debt is a loan that is tied to an asset. Your mortgage or car payments. You fail to pay you lose the asset.

Unsecured Debt is the opposite. It isn’t tied to an asset. The best example would be credit cards. You fail to pay your credit goes down. The lender can’t legally take any of your assets without a courts permission.

Start with Secured Debt and then tackle Unsecured Debt

The reasoning behind this is that you need to keep your assets. How will you go to work if you lose your car? Where will you live if you lose your home to foreclosure, your credit is shot, and you can’t rent a cheap place. Credit card debt is horrible and shouldn’t be undermined. But your home and car payments come first.

After that tackle the loan with the Highest Interest Rate

I hate giving away free money to the lender, and this is what interest essentially is when you break it down. You get a loan, make minimum payments, the interest is added on top of it and the lender becomes rich off of you while you’re struggling to make ends meet. Well, maybe it isn’t this bad but you get the picture. Some advise to start with the smallest loan first. Paying it off will encourage and motivate you to keep killing debt. The issue I have with this is that high interest means more free money I’m giving away. That’s enough motivation for me to start with the highest interest rate.

The best advice is to not rack up credit card debt at all.

Don’t even open a credit card if you can’t pay the balance off full each month (billing cycle). I’ve seen smart and educated people carry a $5k balance each month and are only making minimum payments. All that interest could be going towards savings and investments. Credit card interest rates are high! They might get you with a low introductory rate but that usually only lasts 6 months to a year. That’s part of their scam and is one of the greatest money lies.

If you prioritize debt payments, your priorities in life stand a better chance.

This is a guest post by John @ Fearless Men and Fearless Dollar. He’s an IT Security enthusiast by day and blogger at night. If interested in guest posting please read our guest posting policy and then contact us.

Join our newsletter

Get financial tips from a licensed professional directly to your inbox.

Powered by ConvertKit

Comments

  1. Good post John, and while I agree that this is the more efficient way to prioritize your debt, I think that a lot of folks simply need to build some confidence first that they can even make a dent in their debt. To do that, I think that paying off small debts first (even though it’s less impactful financially) makes a bigger difference psychologically. Probably depends on whether your back is against the wall though!

    • You’re right that some do need that extra motivation. And if that’s what works for them all the more power. But they will still end up paying more interest in the long run. So I wonder which is the greater motivating factor? Closing a loan or paying less interest over time? But I do agree that getting rid of debt is the ultimate goal and satisfaction whichever method they choose.

  2. Thanks for the advice John! My wife and I have been debating whether to pay off our smaller student loans first or the bigger loan with the higher interest rate. After reading this I think we may tackle the bigger loan with the bigger interest rate. Thanks again!

Speak Your Mind

*