“Which debt should I pay off first?”
This is an important question that you have to face when you’re ready to start paying off your debt. You’re going to want to tackle every single debt at once. Unfortunately, we don’t have the money to pay off every single debt at once. We have to make a plan to pay off our debt .
Let’s took a closer look at which debt to pay off first so that you know how to tackle your debt…
“The man who never has money enough to pay his debts, has too much of something else.” — James Lendall Basford
I once 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 by consulting an actual list of debt loyalty. 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, but it’s fun to look at her list to see how ranks debt. This should give you some perspective.
Let’s check out the debt loyalty list to see which debt to pay off first…
Let’s break this down debt to see which debt to pay off first.
IRS Debt.
You need to pay your IRS debt off immediately. Technically you don’t even have a choice because they’ll 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’ll simply remove it from your bank account. If you bank account is empty, well then good luck.
Your IRS debt needs to be tackled first before you can worry about other types of debt.
Student Loan Debt.
Do you have student loan debt? This is the next debt that you should tackle.
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.
Pay off your personal debts so that you don’t owe anyone any money out there.
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.
You can’t avoid your mortgage payments because you don’t want to lose your place. With that being said, you don’t have to pay off all of this debt at once. There’s no rush in paying off your mortgage.
Car Loan Debt.
Do you owe money on your car? This debt isn’t at the top of the list.
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.
That’s the debt loyalty list according to Suze Orman. You have to tackle your IRS debt first and your credit card debt last.
So which debt should I pay off first?
Now that we checked out the debt loyalty list, it’s time to make a decision on which debt to pay off first.
Here’s the system to use to decide which debt to pay off first:
- Look at which debt could cost you the most financially.
- Look into the legal ramifications. You’re going to have to pay off the IRS before a car loan company.
- Consult your lawyer/accountant. You may need professional help in this matter to help you avoid any future legal issues.
That’s how you decide which debt to pay off first.
Which debt are you working on paying down first?
“The only way you will ever permanently take control of your financial life is to dig deep and fix the root problem.” — Suze Orman
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.