Investing Series Part 4 - Pay off Your Debt

Grab a shovel and pay off your debt!

Investing Series Part 4 - Pay off Your Debt
Photo by Pauline Bernfeld / Unsplash

Grab that shovel!

I know I know you want to get to investing. So far all you've talked about it the math, getting your house in order, and emergency funds. Now you want to talk about debt. Yes, yes, I do. Here is the order I propose you think about your finances and investing

  1. Establish an emergency fund of $1,000
  2. Pay off high-interest debt (greater than 5%)*
  3. Extend your emergency fund to at least 3 months of base expenses
  4. Invest in Assets

I borrowed these steps from Alan Donegan

Boom it's that simple!

*student loans and mortgages could be the exception to paying off high-interest debt.

Paying off high-interest debt, if you think about it, is a way to get a guaranteed non-taxed return on your money, it helps free up cash flow, and psychologically it helps you not have all that debt weighing on you.

There are two methods for paying off your debt. The debt snowball and the debt avalanche. How you go about it is the same, just the order of paying them off is different.

The first thing you do for both is list all your debts with the amount, apy or interest, and the term in months if applicable.

For the debt snowball, you list your debts from the least amount to the greatest amount, and you go about paying them off and rolling one payment into another after the first one is paid off. For the debt avalanche, you list your debts from the greatest apy/interest to the least and pay them off that way.

The debt avalanche is mathematically better but harder to stay motivated. The debt snowball isn't mathematically better, but easier to stay motivated and frees up cash flow quicker.

Whichever you choose, the most important part is you have a plan and attack. The sooner you free up your debt. The sooner you can start investing. This also has the added benefit of decreasing your FI number since your expenses will be less overall.

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This article is informational; it should not be considered Health, Financial, or Legal Advice. Not all information will be accurate. Consult health, financial, or legal professionals before making any significant decisions.

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Updated 11/2/23