What is your debt worth?
Now that you have a solid grip on your net worth, you know if you're in the black or the red. The next order of business is to fully assess your debt.
Temptations are everywhere
The times in which we live are incredibly tempting. Consumer goods are widely available and super cheap. When ever you want a new purse or sweater, it's easy to pull up a website and browse. E-commerce websites are specifically designed to tempt you to buy as much as possible. With shopping at our fingertips and lots of plastic money available, it's easy to see how we could dig ourselves into a hole. After all, it feels good to click "confirm" with the promise of looking/being cool.
All this to say, I'm not going to sugar coat the truth of the matter: consumer debt is bad. Compound interest is eating away at your net worth every day! When you buy that purse on credit it costs much more than the initial price. I'll write more on compound interest in a separate post. For now, let's look at your debt.
Your debt load
Open an excel spreadsheet. In one row write down all of the credit cards, lines of credit and student loans. Beside each lender, note the interest rate. Beside each interest rate, record your current debt as of today. Add up the debt and look at the total. Throughout The Money Edit series, we're going to make a plan to get it down to zero and make it stay that way!
Paying it off: Where do I start?
There are various theories on which debt to pay off first. Generally I look at interest rates, and pay off the highest interest rate debt first. Sometimes you'll have an option to move credit card debt to a lower interest line of credit - but the key is to NOT use the credit card until you've established positive credit habits.
When I first started my money edit journey, the first chunk of debt I paid off was my student loan. It was actually a bank line of credit. During university I had to make minimum interest-free monthly payments which seemed like a sweet deal at the time! Not knowing much about managing money, I didn't pay it off in the interest free period. This is what banks are counting on to make huge profits! Once I graduated, the loan went up to 10% interest. Welcome to the real world! Luckily, in one of their routine mailings, TD offered me a "special deal" low interest rate line of credit. I accept it, transferred the balance of my loan and forced myself to pay it off within the 6 month low rate term. Pulling that off is a whole blog post in itself!
Let the games begin!
Once you decide a) if you have any cash that you can throw at the debt b) if you can move your debt to a lower rate line of credit and c) which to pay off first, debt repayment must begin!
Did you realize how little or how much debt you have? Does seeing these numbers motivate you to pay it off?