As the end of the year approaches, you may be starting to think about New Year’s resolutions. One common resolution is to pay down debt, but it’s never too early to get started on that resolution. No matter how much you owe, there are some basic rules of thumb to help you get started.
Why debt is seldom good
Debt can be divided into good debt and bad debt. Good debt usually includes things like mortgages with fixed low interest rates. Even Warren Buffett has taken on mortgage debt, although he always advises against taking on debt. He told CNBC about when he took out a mortgage on his second home, thinking he would do better to have some of the money instead of just paying for the house outright.
On the other hand, Buffett warned against carrying a credit card balance, saying that people “can’t go through life borrowing at those rates.” It was a reference to the extremely high interest rates credit cards tend to charge.
Knowing the difference between good and bad debt is just the first step. Next, you should list every company or individual you owe money to and how much the debt is. Having this list will help you classify your debts as either good or bad and decide which ones to pay off first. In addition to the amount of the debt, you should also list the monthly payment.
After you have your list, you should start deciding which debts to pay down first. You should pay off high-interest debts like credit cards as quickly as possible. It’s never advisable to just make the minimum payments on credit cards because you’ll never get them paid off that way. However, if you have multiple credit cards, you might want to focus on paying off one and making minimum payments on the others until you pay each one off. In such a scenario, you should start with the card that has the lowest balance and then move up from there.
Solutions for serious debt problems
If you’ve been trying to get out of debt for a while but just don’t make enough money to pay off your debts, you might want to look for other solutions. Debt consolidation services can help simplify the process. If possible, it would be wise to get a debt consolidation loan so that you’re making just a single payment on your debt every month.
In the worst-case scenario, bankruptcy might be an option. You shouldn’t let debt hang over your head forever. If you do end up filing for bankruptcy, you should take steps to ensure that you don’t end up in the same problem again.