Which debts should I pay off first?

Total consumer debt hit a record $ 14.3 trillion in early 2020, according to the Federal Reserve. To put that 14-digit number in perspective, a recent Experian study found that the average person had credit card debt in excess of $ 6,000 in 2019.

Those who have carried significant debt know how stressful it can be to live with that added financial weight, especially when you have multiple types of debt. We asked five experts to weigh what to cash out first.

Before you start

All five experts we spoke to emphasized the importance of having a basic level of savings before dealing directly with debt. Often referred to as an emergency fund or rainy day fund, these savings can protect you from the worst of the consequences of unforeseen expenses.

Many personal finance gurus recommend saving three to six months in emergency expenses, but if that’s not achievable right now, then working on $ 1,000 or a month in expenses is better than nothing.

Bernadette Joy, founder of Crush Your Money Goals and who has paid off $ 300,000 in debt in three years, always recommends starting with a month’s spending as a starting point. “I consider it a severance payment for myself,” she says. “I know I have 30 days for mental clarity.”

If you put all of your money into debt before you have any savings, it could set you back. Without savings, you could be left in debt through an emergency such as an injury or a car breakdown.

Of course, this doesn’t mean that you should stop paying off debt entirely until you get an emergency fund. “At the very least, they want to make minimum payments,” said Tracy East, communications director at Consumer Education Services, Inc, a not-for-profit debt counseling firm in Raleigh, North Carolina. It is important to keep making payments to build your creditworthiness and show that you are a reliable borrower.

Choose your debt settlement strategy

Experts tend to get caught up in competing camps as to which debt settlement strategy works best.

The debt avalanche approach is when you first focus on paying off debts with the highest APR (annual percentage, the interest rate plus loan fees). As soon as this has been paid out, switch to the card or account with the next higher effective annual interest rate. This method results in the most interest savings, and in general, this method prioritizes credit cards and personal loans over student loans, which often have the lowest interest rates of any type of debt.

Paying off debts with the highest APR or balance first is also a great way to improve your credit life, says Jennifer Streaks, personal finance expert and author of Thrive! … Affordably. If your credit card limit is $ 3,000 and you have $ 2,500 in balance, it will hold back your credit usage, which will tell you how much of your available balance you are using. “It looks like you are not using credit responsibly,” says Streaks.

Pro tip

Make sure you have an emergency fund or at least a month of spending saved before you agree on a plan to pay off your debt. Whatever method you choose to pay off your debt, make sure it fits your lifestyle and can be maintained for the long term.

On the flip side, the debt snowball approach prioritizes the account with the lowest balance before moving on to the account with the next lowest balance. While you’ll pay more interest fees over time using this method, a quick start can be an effective motivator, says Kimberly Zimmerman Rand, director of Boston-based financial advisory firm Dragonfly Financial Solutions LLC. “People I work with really reacted to this sense of achievement.”

Which approach is best for you is more of an “emotional decision” than a “dollar and dime decision,” says Rand. What works for one person may not work for another.

Bernadette Joy once worked with a client who had personal loans, credit cards, student loans, and money owed to a family member.

The debt snowball approach Joy usually recommends would let her clients settle debts with the lowest balance, but in this case the larger family loan weighed on the client’s personal relationships. Joy said she worked with the client to prioritize family credit. “Personally, I will always choose relationships and people who are important to me [over money]. “

Stick with it

Aside from a sudden cash gain, there are no quick fixes to debt settlement. In order to pay off debts, you need to change your lifestyle and your relationship with money as a whole. “The biggest change in mindset is seeing debt as a solution to seeing it as a problem to be solved,” said Jackie Beck, debt expert and creator of Jackie Beck’s Pay Off Debt money app.

“You didn’t get in there overnight and you won’t get out overnight,” says Streaks. Be patient with yourself when you screw it up and don’t be afraid to ask for help. Tracy East of Consumer Education Services, Inc suggests speaking to a nonprofit credit counselor with the National Foundation for Credit Counseling or other nonprofit organization if you’re overwhelmed and unsure how to move forward.

Depending on the size of your debt, it can feel like an arduous journey, but achieving financial stability and a positive relationship with money is worth it in the long run. You can’t put a figure on peace.