When I finally paid off my small private Sallie Mae loan a couple years ago, I felt a huge relief. In fact, there is nothing like the feeling of not owing anybody anything. Just imagine how easy life would be if your car is paid off, your mortgage is paid off, you have no balances on your credit cards, and no personal loans. Life would indeed be great. And that would be financial freedom. The opposite of that, however, is just financial slavery.
Carrying a lot of debts is just financial slavery. I am not saying, however, that all debts are bad. Debts acquired by purchasing a real estate property, for example, is a good debt, because helps you to buy something that increases in value and generates income. And some mortgage loans are tax deductible.
However, debts that are not bringing any sort of income, are just bad debt, and should be paid off as soon as possible. Some people may be tempted to pay off the debts that have the fewest payments and/or smallest balances, and that paying those debts first give them a sense of accomplishment. Although this makes sense emotionally, logically it does not make the best logical sense. A better approach is to pay those debts with higher interests first, usually above 18 percent. Here are the debts to pay off as soon as possible:
1. Payday Loans
First if you don’t know anything about payday loans, good! Payday loans are small loans usually between $100 up to $2000, that must be paid within a pay period or a year. Anybody with a decent credit score and a decent employment can get these type of loans. The interest rates on these loans, however, are outrageous. They can range from 300% to 750%. Pay these loans within the two week period, or you can end up paying thousands for a $200 loan.
2. Credit Cards Debt
This is a no brainer. We all know that credit card debts should be paid off as fast as possible, because they usually carry a higher interest rate between 18 to 21 percent. If you don’t have enough money to pay your debts as fast as possible, see if you can switch to a lower rate card. A $1000 balance on an 18 % interest credit card will cost you more than $180 in interest over one year. If you switch that balance to a 14 & percent card, you will save about $40.
Also, resist the temptation of paying the minimum payment. If you make the monthly minimum payments, it will take you longer to pay off your debt. By making higher payments, you will have less total debt because you owe less interest, and you will have a higher principal payment, reducing your debt more rapidly.
3. Car Loan
The next debt to pay off as fast as possible is a car loan. However, some car loans are installment loans with add-on interest, which means you will owe the same amount of interest whether you pay it off early or not. So don’t pay it off if you have a loan like this.
4. Small Private Student Loan
Next look at your small private student loan. Almost every student, undergraduate or graduate, have some type of private loans. Those loans are not government loans and so the interest is usually higher and ranges from 9 to 13%. If it is a small loan, it would make sense to treat it as a credit card debt and pay it off as early as possible. Again, make more than the monthly minimum payments to reduce the amount of interest and to pay it off early.
5. Low Interest Rate Loan
Mortgages loan and government student loans usually have low interest rate, and those should therefore be the last to pay off.
In short, living debt free begins with paying off your high interest debts and minimizing your use of credit.
Do you agree that these are 5 easy tricks to help you live debt –free? Why or Why Not? What are other ways to live debt-free? Share your thought in the comments below.