Credit Cards and Debt

Pay Off Debts For A Guaranteed Return

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Cutting credit cardsInvesting is all about making your money work for you and make you more money.  It’s almost a romantic notion to think about money coming to you that you didn’t “work” to get.

Much less romantic is the idea of getting out of debt.  Everything about debt is negative.  No one feels good about being in debt, and the idea of getting out of debt sounds like it will require a lot of pain and sacrifice.

When it comes down to it, investing while you’re still in debt doesn’t make a lot of sense.  Your debts come at the price of interest charges, and unlike investing, paying that interest is guaranteed.  Plus, without debt, you’d have much more cash to put towards your investments.

So let’s talk about how to get out of debt so you can get your money working FOR you instead of against you.

How Far In The Red Are You?

Lots of us deal with debt by ignoring it.  As long as you make the monthly minimum payments, the total amount doesn’t really matter.  Plus it’s a lot easier to swallow a monthly payment as an ongoing cost vs. seeing a huge number with a negative sign next to it.

That’s about to change.  Grab the most recent statement from every debt you have.  That includes credit card statements, student loans, car loans, lines of credit, and personal loans. Add ‘em up and wipe away a single solitary tear as you finally realize just how much you owe.

Get Angry

Money is a very emotional topic.  If you get excited about investment income, you should get angry about debt.  Every dollar is holding you back from realizing your dreams.

Make A Plan

Most investors look predominantly at the numbers.  Of course it makes sense to pay off debts in order of highest interest rates.  Knocking out those high interest loans first will save you money in the long run.

There’s another school of thought, commonly called the snowball method, which says you need a psychological boost when paying off debts, and the easiest way to get these is to knock out some small debts first.  To do this you list your debts from smallest to largest and pay off the smallest total amount first.  If you have 6 total debts and can pay off one that’s just a few hundred dollars it may not make a big impact on your total debt load but you can now look at the list and see 5 debts instead of 6.  It’s very encouraging.

It comes down to discipline.  If you’re sure you can stick to a plan and not slide back down the hill, high interest payments will work a bit better. If you’ve struggled with debt repayment in the past, try the snowball method.

Using Online Calculators

See how long it will take to get out of debt with tools at http://debt.ca/.  Get motivated and excited at every dollar you can invest once your debts are cleared!

2 Comments

  1. I agree that before investing it is important to get out of most debts first. However I think there are a couple exceptions. 1.) If your employer offers a 401k, it is important to get started saving for retirement as early as possible. I say this because I’ve seen many people say they will start once they get out of debt. Unfortunately this day doesn’t seem to come and next thing they know it is too late and they’ve missed out on lots of time for compounding. 2.) If the only debt you have is low interest debt then I believe it is ok to not pay this off early. For example, the only debt I have is a low interest mortgage. I believe I can earn more by investing than I pay in interest on this debt.

    Except for those 2 exceptions I agree that everyone should strive to be debt free.

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