At the very beginning of Studenomics I wrote about how you can rank your debt. This was a very basic post that ranked debt for good debt (student loans) to bad debt (credit cards). After reading other blogs and talking with the readers I realized that paying off debt is an endless discussion. Today I wanted to discuss which debt you should pay off first.
Suze Orman is known for her debt loyalty list where she ranks which debt you should pay off first. I’m not saying that I support Suze Orman because frankly I think we should all educate ourselves on personal finance from a variety of sources. It makes no sense to accept tips on paying off debt from only one person. With that being said I think that the debt loyalty list makes sense. It is essential that all young professionals look at this list to determine which debt to pay off first:
IRS Debt
Let’s face it if you owe the IRS money you are screwed. You need to pay your IRS debt off immediately. Technically you don’t even have a choice because they will just garnish your wages until all of your debt is paid off. If you decide to work cash jobs to hide your money from the government then they will simply remove it from your bank account. If you bank account is empty, well then good luck.
Student Loan Debt
Student debt is on the rise and it’s here to stay for our generation. The harsh reality about student debt is that even if you feel that you need to claim bankruptcy in the future you will not be able to discharge your student loans. You can consolidate your student loans but at the end of the day they need to be paid off.
Personal Loan Debt
If you owe someone money you need to pay them back. You don’t want to be labeled as “unreliable” early on in your career. It doesn’t matter if you owe the money to a co-worker, relative or your drinking buddy Steve, you need to pay them back as soon as you can. If you become the “broke friend” in your 20s then you’re going to kill your credibility and decrease the chances of people helping you in the future.
Mortgage Debt
Just because you bought that new condo downtown after college it doesn’t mean that it is yours forever. You need to keep up with your monthly mortgage payments. Once you begin to fall behind it will become increasingly difficult to catch up.
Car Loan Debt
You wanted that brand new car right after college so now it’s time to pay it off. You could avoid a car loan debt altogether by taking the bus to work but that’s a different discussion for a different day.
Credit Card Debt
Credit card debt is probably lower than you guys expected it to be. I personally think that you need to get rid of your credit card debt ASAP. Suze argues that it is “unsecured debt” so you don’t have to worry about losing your new condo.
Which debt are you working on paying down first?
Not a bad list of priorities, although it seems to be more for if you are fearful of going into debt in the near future. If your finances are strong, you have a reliable income (which, admittedly, can be a bit hard to come by in today’s economy), and an ample emergency fund, making a priority of your highest interest rate debt (usually credit cards) will save you money in the long run and make the debt easier to pay down. If there’s essentially zero chance you will go bankrupt, making your debt repayment priorities on the basis of which ones will persist after bankruptcy makes little sense.
That said, if your finances are shakier, then by all means, work to pay down the debts that won’t be wiped out by a bankruptcy first, before worrying too much about those that can be cleared if you’re forced to fill for bankruptcy. Just my thoughts.