While it would be wonderful to live your life completely debt free, it is likely that you don’t. There are a few people that pay cash for everything including houses but chances are good that isn’t you. When you have a mortgage as well as other debt, how do you prioritize where to pay extra money to when you have it? If your goal is to be debt free eventually, there are many different ways to go about paying down your debt.
First and foremost, eliminate excess spending to ensure you aren’t increasing your debt and develop a budget that accounts for all routine expenses as well as allocates some money to savings for unexpected items. After you have a clear budget, determine how much extra money you have each month. Then you have to decide where to put it. There is a reason to put it everywhere and most choices aren’t wrong but think about the big picture and then decide what you should do. Here are a few things to consider when you make this decision.
- Look at the cost of each debt you have. Chances are good that your mortgage interest rate is lower than any other debt you have so it may be a better debt to have than other options.
- Credit cards tend to have the highest interest rates so it is a good idea to pay down credit cards first to see the most savings.
- If you have multiple debts with similar interest rates, it may be hard to know where to start. Consider starting with the smallest balance you have on anything and pay that off first then snowball that amount into the next debt and so on. This is a popular approach called the debt snowball method that allows you to see results fast and encourages you to continue paying down debt.
- If you get a raise, don’t adjust your budget to spend more money, add that extra money to your available expenses to pay down your debt faster.
- Do you have a lot of small balances on store credit cards, personal loans, furniture purchases, etc.? Pay these off completely as soon as you can to eliminate having so many accounts with balances.
- If your mortgage is higher than the value of your home for some reason, you may want to consider paying extra money here in case you wind up in a position where you need to sell your home. Owing more than your home is worth can make selling a challenge so eliminate this situation if at all possible.
- Do you have any debts that are behind? If you have any delinquent debt, make a plan to pay this as quickly as possible. Loans that are in default can have extremely high interest rates or monthly penalties. Allowing these to grown indefinitely can make these almost impossible to pay off so if you are behind, make your top priority paying those accounts off immediately.
There are so many things to consider to determine what is the best approach to your finances. If your situation is really unclear, find a financial advisor in your area that can help you look at your debt and income and determine a plan that will allow you to maximize your income to your greatest long term benefit. Don’t forget financial planning is best done from a long term perspective and not a short term plan and you will be on the road to a positive financial future.
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