Financial Literacy: How to Decide Which Bills to Pay First
When you first decide to take control of your finances, figuring out how to tackle your debt can make or break your new mission in life.
There’s a lot of planning to do but here are some ways to make your decisions a little easier as you decide which bills to pay first:
Know what kind of debt you have
I dare you to find me a personal finance book that doesn’t ask you to tally up your debt somewhere in there. In truth, it’s a necessary part of financial housekeeping. You need to know your numbers. So go ahead, grab a glass of wine and all your loan and credit statements and start adding things up.
Okay, you have your number now. Is it as bad as you thought? Maybe it is and maybe it isn’t, the important thing to know is what to do with that number. From here, you can break down your totals into your “good” and “bad” debt. This will help you organize your finances and prioritize which bills to pay first.
Generally, any debt that’s been incurred to buy an appreciating asset and is borrowed at low interest rate can be considered “good” debt. Buying a home or paying for school can be considered good debt because these tend to increase in value over time and give you a good return on your investment.
Bad debt, on the other hand, is buying something that will depreciate in value and/or is borrowed at a high interest rate. Carrying a balance on your credit cards is bad news because you end up paying hundreds of dollars to maintain the status quo on your accounts.
Buying a car or furniture can also fall into this category because these things tend to decrease in value and leave you in a worse financial situation than you were before the purchase. If you do end up buying something like an expensive car, make sure you get enough insurance to protect it.
Figure out which debt to focus on first
If you look around the Internet for advice, one of the most common suggestions is to pick the debt with the highest interest rates and attack it. It’ll save you the most money in the long and run and get you started on the right foot.
When deciding which bills to pay first between a credit card with a 30% interest rate and a car loan with a 5% interest rate, your best bet is to start with the store credit card because that’s where you’re losing most of your money.
However, I’ve always done best when I can see results quickly. Because of that, I had to take a different approach to my own debt paydown. I started with paying off my smallest debts first so I could feel like I was making progress. This means I tackle the $500 store credit card balance first so I see the progress I’m making right away.
It was important for me to see those zeroes rolling, especially when I first started out. I could celebrate those milestones and move on to bigger and better goals. It got the ball rolling and helped me reach the next level.
As you decide which bills to pay first, you need to weigh the impersonal numbers against your psychological needs. The best debt to tackle first is the one that will help you stay motivated to move forward.
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