One of the best things you can do for your finances is to be careful about the way you approach debt. While it might make sense to keep some debts around for the entire term, the reality is that all debt is a drain on your resources. If you don’t have a way to more than makeup for that drain, you could run into serious problems with your money.
If you have multiple debts, and you are trying to get your financial house in order, it’s important to pay attention to which debts you should tackle first. Here are some things to consider when deciding which debts to pay off first:
Interest Rate
Your first concern should be the interest you are paying on your debt. Interest represents money that you pay straight into someone else’s pocket in order to keep carrying the debt. It doesn’t benefit you at all. The higher the interest rate, the greater your resources being diverted elsewhere. When deciding which debts to tackle first, those with high rates should be at the top of the list.
If you have high-rate payday loans or car title loans, these are the first loans to tackle. Credit card debt also usually comes with pretty high interest. If you have a lot of credit card debt, begin paying that down if you can. Getting rid of that high-interest debt can free up some of your resources for other uses.
Tax Breaks
You can also consider the tax break you can expect from the debt. Some debts come with tax deductions for the interest you pay. While a tax deduction isn’t a dollar for dollar reduction in what you owe, it can be helpful for you. You’ll reduce your taxable income, lowering your tax bill.
One of the great things about student loan debt is that it is often relatively low-cost, and it is also tax-deductible. However, you don’t need to itemize your deductions to take advantage of your student loan debt. Instead, you can take the deduction “above the line,” which is convenient.
Your mortgage interest might also be tax-deductible, but you have to itemize in order to take advantage of that deduction. In many cases, you’ll need the total of your itemized deductions to exceed your standard deduction to make it “worth it.” If you don’t have enough deductions to make itemizing worth it, you won’t receive a tax break for your mortgage interest.
The interest on business debt can also be tax-deductible. Check with a professional to determine what interest you can deduct.
If you are able to get a low-interest loan and it comes with a tax advantage, that reduces your costs. It might not be worth it to put your resources into repaying that loan fast if you can use the money you would have spent to invest and gain a higher return.
Run the numbers to see what works best for you, and what will help you sleep at night, and then base your debt pay down plan on the best option.
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