How and When to Payoff Debt
Debt can be a source of stress for a family or a business. I have found that if there's a plan in place to reduce and manage the debt, the stress is significantly reduced. When making a decision to pay extra towards debt, there is a ripple effect... Consider there is less money for you to use elsewhere i.e. saving for your retirement, college for kids, emergency savings. As you pay more towards the debt, you have less control, and compound interest is not working for you but for the debt institution. The net effect of this is that you lose that money. Here is the hierarchy of how money should flow: 1. Protect today, 2. Save for tomorrow, 3. pay extra towards any debt, 4. live off the rest. This way your money will work for you first and compound interest will start earlier and have a bigger effect for your financial goals. As long as you are paying the minimum payments, the debt does not compound against you and you will pay it back with less valuable dollars if inflation rises. When you are ready to tackle the debt, payoff the debt balance that requires the most cash flow first. Here is a debt formula: Divide the loan balance by the minimum monthly payment. If the result is over 100 it is actually efficient debt, if it is less than 50 it is inefficient and should be paid off sooner to free up more cashflow. Another strategy is to restructure the debt into 0% credit cards offers and if possible a home equity line of credit.
2019-79279 Exp. 05/21