Ordinary problems do not go away during a crisis.
Take debt, for example. If you were in debt at the beginning of March, you are still in debt, and probably more.
Where the hell do you even start?
The first step is to get your head out of the covers and calculate your debt. All. No matter how scary it can be.
Here’s an example to get you started:
Total debt: $ 440,600.
OK, you have faced reality. It’s a fat not in the right direction. Now you need to decide which debt to eliminate first.
There is bad advice on this. Some personal finance gurus recommend the “snowball method,” where you pay off the debt with the lowest balance first. It’s an easy win, and it’s supposed to motivate you to keep going.
I don’t like the snowball method at all. If you tackle the smallest debt first, it might not be the debt with the highest interest rate, and you’ll end up paying more in the long run.
Secured Debt Against Unsecured Debt
A better way to approach things is to look at your secured debt and unsecured debt.
Mortgages and auto loans are secured debts, which means they are backed by property. The bank will kick you out of your house if you don’t pay your mortgage. And the pension man will tow your car if you don’t pay your car loan. Both are bad scenarios.
Credit card debt is unsecured debt. If you don’t pay the bill, the account will eventually be collected and you will receive many nasty phone calls.
You can try to consolidate, but it is difficult to make past due credit card debt go away. You might come to some sort of settlement, but eventually you will have to pay it unless you file for bankruptcy.
So where to start ? Well, it’s hard to pay off debt if you don’t have a place to stay or a car to get to work.
Credit card debt carries higher interest rates than secured debt. So, in theory, you should pay off your credit cards first. But if you lose your house or your car, or both, you’re really stuck. So, it’s generally a good idea to prioritize your mortgage and car loan first.
Once you’re on top of senior secured debt, student loans are next. Then you focus on the unsecured debt with the highest interest rate.
Not the snowball method – the highest interest rate.
Sure, the snowball method can give you some sort of psychological victory, but you lose money that way. You pay more interest. How is it good?
Suppose you have a balance of $ 2,000 with an interest rate of 8% and another balance of $ 18,000 with an interest rate of 21%. If you hack the smallest balance first, you are literally losing money every day. It might not be as satisfying to pay off the most important balance first, but it’s what you need to do. Take a big chunk of this thing every time you get paid.
Keep in mind that you need to make the minimum payments on all of your debts during this whole process. The priorities that we have just covered concern the elimination of the debt. It’s a debt filing system to throw every penny on until it’s used up.
Debt is holding you back
A family member recently told me that he was halfway in credit card debt. This guy pays $ 7,000 a year just in interest, which is terrible.
This is a very common problem, but you have to face the facts: if you are in debt, it prevents you from realizing your potential. But you can take control of your life.
I get it – buying stuff is fun. You get cars, jewelry, vacations. But financial freedom is also fun. Invest too. You arrive at buy stocks and watch them go up! But you have to tackle your debt first or you will never get there.