Paying Off Debt the Right Way
One way or another, we will all fall into some sort of debt that will need to be paid off. Whether it is an engagement ring, a new car or a big vacation you just purchased, more often than not, you will not be paying off debt for these items out of pocket.
Let’s say that you have just purchased a car but are still paying off your credit cards and student loans. (This is a very real situation for a lot of people currently in their 20s.) How do you organize which payments to make first?
One of the best organizational tools to help you sort out your personalized payment plan is an Excel spreadsheet. The spreadsheet should have as many categories as necessary for you, but it should at least include the amount owed, minimum payment amount, and interest rate of each loan.
The most important factor in deciding which debt to pay off first is interest rate. A higher interest rate means that a higher percentage of your payment will go to the account holder and less of it will go to paying off the principal of the loan.
The first debt to tackle would be your largest loan with the highest interest rate; however, your largest loan may not have the highest interest rate. Plus, the interest you pay on some debt (debt secured by real estate) can be tax-deductible. Each person’s scenario is very different when it comes to who and when to pay, but if possible, paying off your biggest non-real estate debts with the highest interest rates first is the best way to go.
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