Staying Focused Amid Multiple Debts

False Assumptions

It is self-defeating to talk about a mortgage, student loans and credit card/personal loans all on the same line. Since everyone needs shelter, most people either pay rent or have a mortgage. All things being equal, given the tax advantages of having a mortgage, that is the last debt you want to think about paying off.

Student loans, as large and as daunting as they may be, usually have much lower interest rates compared to other kinds of debt.

So that leaves the credit cards, car loans, and personal loans. Although car loans are collateralized by your car, your car loses value over time, so borrowing to pay for one isn't such a great idea.

Anyway, to pay off multiple debts, you use what is known as the snowball method. Instead of getting demoralized trying to pay a little extra on each debt, you zero in on one debt, paying the minimums on all others until that one debt is gone. You then zero in on another debt, combining payments to pay off the second debt and so on.

The trick is start the right way. Logically, you want to eliminate the debt with the highest interest rate. But people find it much more satisfying to be able to pay off a debt, any debt. So you can either start with the smallest debt, or, the debt that will be paid off soonest by dividing the current balance by the monthly payment. You will pay extra interest in the long run, but consider that the cost of peace-of-mind.

JimmyDaGeek of MD @ Apr 23, 2008 15:45:29 PM