Prioritizing Debt

When we look at our balance sheet, it’s always a good check-in at all the different entities to which we owe money. On the most recent balance sheet we have: credit cards, car loan, HELOC on rental property, family loan, and primary mortgage on our home.

It’s a lot of debt to pay off if we want to move to a place like this some day.

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It’s pretty easy to just let your eyes glaze over the details and only focus on the “Total Liabilities” line, but in reality all debt isn’t created equally. Because of that, we’ve actually prioritized our debts and the pay-off schedules that we want to make on them.

Our debt plan may look a bit different from yours (after all, personal finance is very personal), so I’ll try to explain our reasoning on why we’ve prioritized some over others. As a general rule, you often want to try and pay down the debt with the highest interest rate and/or the shortest term the best. I also include in there that if there’s any debt that’s revolving(that’s when you can draw again on the debt after you’ve paid the principle down – as in a credit card), it makes sense to give that extra consideration since in an emergency you can always draw on the revolving credit line again.

Pay In Full Every Month

  • Rewards Credit Cards are the main items that fall into this bucket. We use these for pretty much all of our everyday spending and always pay the balance in full every month. They have pretty high interest rates, so we have no desire to ever pay interest on these.

Pay the Minimum Payment Each Month

  • Car Loan – we have one car loan, on a car we bought a couple years ago. It’s a 60 month (5yr) loan, with a rate of about 4%. Since we’re not underwater on the loan (that’s when the car is worth less than what you owe – and it is VERY common in cars), and the 4% rate is one of our lower interest rates, we don’t pay any more than we have to toward this loan.
  • Refinanced Mortgage – We recently refinanced our mortgage to a 15 year loan at 3.25%. This is definitely one of our better interest rates, so we’re not really keen on paying it down faster than we have to. That being said, out of habit, we’re still on the bi-weekly payment schedule for the loan, which means we make the equivalent of 13 monthly payments each year, not 12. And the 13th payment goes directly to the principle. It’s a good habit to get into, though with our loan this good, this isn’t really saving us too much in the long run.

Pay Minimum Interest and More When Can

  • Family Loan – We owe $50K to Mr. PoP’s family, which is an unsecured loan at 5% that has a little more than 3 years left on its term. We’ve been making interest only payments on this loan so far, as we want to keep the accounting as clean as possible because we’re dealing with family. It’s not that we don’t trust anyone or think they don’t trust our bookkeeping – it’s just that mixing family and money always presents the possibility of messiness, so we’re looking forward to paying this one off in full close to the time that the term is up.
  • HELOC – This Home Equity Line of Credit is basically a revolving credit line that is secured by the rental duplex that we own. Our HELOC is set up that the credit line is open for 10 years, and at a minimum you pay interest on the amount you have extended on the line, at a rate that usually fluctuates with the market. Our current HELOC rate is a little over 6% (the highest out of all of our loans, but still not that high), and we have extended it out to the maximum balance we can have on it, $38K. We also have about 9 more years of revolving credit on this line, at which point any remaining balance would turn into a term loan.
  • Between the Family Loan and the HELOC, the family loan has the shorter term and bigger balance, but the HELOC has a slightly higher interest rate. So which do we pay off first? For us, the kicker is that the HELOC is revolving. Say we pay off the entire $38K off on the HELOC in the next year (which is the current goal). If we somehow have major trouble saving the following year, then we only have to come up with $12K to be able to pay the Family Loan off in full when it comes due. $12K + $38K from re-extending the HELOC = $50K for Family Loan Payoff.

So the plan is to pay down the entirety of the $38K HELOC over the next year and then save up and pay off the $50K Family Loan over the year or so after that. If we do that while we’re paying down two more years on the car, then we’ll have paid off a little over $100K in debt and interest in about 27 months. It’s a big goal, but I’m betting it’s going to feel pretty excellent when we get there.

Do you have any debt pay-off plans? What sort of criteria do you take into account?

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