What Debt Should I Pay Off First?

Most people use debt for short term needs and don’t intend to keep adding to it. Unfortunately, it’s really easy to overestimate how much debt you can handle and forget to leave room for emergencies.

Regardless of what debt you have, the long term goal is to keep your total minimum monthly payments under 30% of your total take home pay. Here are two different strategies to free up your cash flow and reduce your overall debt load.

  1. Deal with the elephant first – Other than your mortgage payment, what is the next largest monthly payment you owe each month? What is the current payoff? Think about creative ways to pay that off as quickly as possible. Reducing the largest payment will have the greatest impact on improving your cash flow and reducing your debt-to-income ratio.
  2. Deal with the snail – Identify the debt that doesn’t seem to be going down. Usually the monthly payment barely covers the interest each month, so there’s not much paying down the actual principal balance. It just kind of sits there creating a stream of constant income for the lender. Make extra payments as often as you can until it’s paid off.

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Published by Ladybug Collaborative Inc

We bring clarity to personal financial management by providing the most accurate snapshot of your finances. Clarify * Simplify * Equip

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