Debt, Personal Finance

5 Steps to Prioritize and Pay Off Debt

Have you ever been working at something and, all of a sudden, begin to wonder if you’re doing it correctly? Sometimes I wonder, am I doing this the best way possible, or is there a better way? I’m sure we’ve all had those moments (some more stressful than others). It can be especially stressful when you start to wonder about this while dealing with your finances. No one wants to be in debt for a moment longer than they have to, so it’s no surprise that you may be asking yourself this question on a regular basis. Trust me–I have done this more times than I can count.

WELL… My dad, also known as our financial advisor, forwarded us an article from Fidelity Investments, which is a step-by-step guide to paying off debt. He sent it to us because it’s actually what we’ve been doing all along! Imagine our surprise to know that the experts agree with our debt payoff plan. At that point, even after paying off $10K worth of credit card debt, it was nice to know that we were structuring our finances in a way that financial experts would endorse. Sometimes you just need that extra bit of validation, y’know?

You can find the original article from Fidelity here.

**This is not an affiliate post for Fidelity, I just thought it was really cool and totally useful to share!

1) Set aside money for an emergency. We probably could have done more of this, but we were really gung-ho about paying off our credit card debt as soon as possible. We both had also just gotten new jobs, so we weren’t exactly worried about getting canned anytime soon, but now, I would definitely encourage saving at LEAST three months worth of emergency funds. After all, you never know!

2) Don’t pass up “free money” at work.  For this one, I combined the two retirement-themed steps suggested by Fidelity. Both of us were super pumped about FINALLY being able to contribute to retirement, so this was a no-brainer. If your employer can match contributions you make to a 401(k) or 403(b), TAKE ADVANTAGE and DO NOT TOUCH IT. Lately, I’ve been hearing stories about friends of friends who are thinking about dipping into their retirement accounts for one reason or another (it’s usually not for a very good reason anyway) and I’m just horrified. To me, nothing is worth gambling your future. This can always be debated, but I believe it’s a lose-lose situation. Even if you dig yourself out of a current problem with that money, that’s less you’ll have for the future. Plus, there are certain penalties involved with taking money from your retirement anyway. Basically, max out your retirement contribution and leave it alone.

3) Pay off high-interest credit card balances first. Personally, I’m not a financial advisor and I don’t have an accounting degree. However, I do know that if I’m paying on debt, it makes sense to knock out the debt that will accumulate the most interest over time. Once that is gone, so is the interest that’s rapidly building up. Stu and I both had credit cards, but none of them had the same interest rate. Therefore, we planned to pay them off based on their interest rates (highest to lowest). That way, the amount of interested accrued by the time we got to the last card balance was minimal.

4) Pay down PRIVATE student loan debt next. Private student loans carry a higher interest rate than government student loans. Also, there is no opportunity for loan forgiveness (e.g. public service, 20 years of continuous payments, etc.) for private loans, so we want to get rid of those as soon as possible. This is a little-known fact, but student loan companies aren’t that bad to deal with (at least in our experience). Dealing with cable companies and insurance companies have been more torturous than dealing with the student loan companies! Who knew? All it takes is calling them and having a conversation about your payment plan. They’re a business–they want their money, so they’re going to figure out a way for you to pay them rather than defaulting.

5) Pay the monthly minimum on government student loans, car loans, and mortgages. In a nutshell, these types of loans usually have lower interest rates and tax advantages associated with them. Government student loans offer a variety of payment plans that can make your payments more manageable depending on your financial situation. They also offer Public Service Loan Forgiveness, which Stu and I are both taking advantage of. If you work for a 501(c)(3) organization (a non-profit, state agency, etc.) and enter the PSLF program, the remaining balance of your loans can be forgiven after making 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. What this means is if you work full-time for a 501(c)(3), set up an income based repayment plan (so you’re not paying an outrageous bill every month), and make your payments on time for 10 years, you have the opportunity for the balance to be forgiven. Obviously, this depends on how much student loan debt you have and what kind of industry you’re in, but it could definitely be worth it in the long run.

Our overall plan for debt payoff has been based on eliminating the most costly debt first, such as high-interest credit cards and private student loans, and finally working toward paying off debt like government student loans that offer some kind of tax advantage or loan forgiveness. Again, this is not an affiliate post to promote Fidelity Investments, but it was a pleasant surprise to find that our debt payoff plan was on point with what the experts suggest. If you’re working on your own payoff plan, this may give you a few ideas about how to prioritize and organize your goals. But remember, the most important aspect of paying off debt is making a plan and sticking to it. If you have a little self-control and keep your eyes on the prize, it will be SO worth it when you make that last payment!

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2 thoughts on “5 Steps to Prioritize and Pay Off Debt

  1. oh man, how much do I agree with this?! So, so much.

    when we first starting trying to get out of debt, I was binge-reading financial advice like it was going to be deleted off the Internet. I’m sure you’re super familiar with the “Dave ramsey snowball approach,” where you pay off debt starting with the smallest debts and snowballing into the big ones.

    I’m really glad to hear you offer a differing opinion. We certainly started with the snowball approach and paid off the cards that were only $200 or $300 first. it felt good to close down those accounts to see more $0s pop up. But once those little debts were cleared and only “big” ones remained (we’re talking all the ones over $1k), I definitely shifted gears. Pay the higher interest first. And, if you can? shift those debts into other accounts.

    a huge part of our success was because we shifted the debt (mostly husband’s) to my accounts, because I could get the 0% interest rates and he couldn’t. while i don’t recommend this to everyone (or even the majority of folks, really — not everyone has as secure of a marriage as we do!), it saved us thousands in interest charges. I think the calculation on it was something like $3500 within 18 months.

    it’s SO important to get those big interest rates down– and also, to call those companies and see if they can work with you on their rates. like you said, these companies just want to get paid. a lot of times, they’ll work with you to see what they can do for you.

    1. Yes! I was really into the Dave Ramsey method, which is still great, but if you have those high interest rates, why not knock those out first and save yourself some money? And you have a great point–if you’re working on paying off debt with someone else, you have to find some sort of common ground and come up with a plan of action that you both can get on board with. It’s always best to evaluate your situation and go from there–not one size fits all!

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