Which Debt Should You Pay Off First?

Nearly every type of debt can interfere with your financial goals, making you feel like a hamster on a wheel – constantly running but never actually getting anywhere.

If you’ve been trying to dig yourself out of a debt hole, it’s time to take a break and look at the bigger picture.

Did you know there are often advantages to paying off certain types of debt before other types? What the simple list below doesn’t include is the average interest rates or any tax benefits to a given type of debt, which can change your priorities. Let’s check them out!

Credit Cards
For most households, credit card debt is the place to start – stop spending on credit and start making extra payments whenever possible. Think of it as an investment in your future!

Auto Loans
Interest rates for auto loans are usually much lower than credit card debt, often under 5% on newer loans. Interest rates aren’t the only consideration for auto loans though. New cars depreciate nearly 20% in the first year. In years 2 and 3, you can expect the value to drop another 15% each year. The moral of the story is that cars are a terrible investment but offer great utility. There’s also no tax benefit for auto loan interest. Eliminating debt as fast as possible on a rapidly depreciating asset is a sound decision.

Student Loans
Like auto loans, student loans are usually in the range of 5% to 10% interest. While interest rates are similar to car loans, student loan interest is often tax deductible, which can lower your effective rate. Auto loans can usually be paid off faster than student loan debt, allowing more cash flow to apply to student debt, investment accounts, or other needs.

Mortgage Debt
In most cases, mortgage debt is the last type of debt to pay down. Mortgage rates are usually lower than the interest rates for credit card debt, auto loans, or student loans, and mortgage interest may be tax deductible if structured properly. If mortgage debt keeps you awake at night, paying off other types of debt first will give you greater cash flow each month so you can begin paying down your mortgage.

When you’ve paid off your other debt and are ready to start tackling your mortgage, try paying bi-monthly (every two weeks). This simple strategy has the effect of adding one extra mortgage payment each year, reducing a 30-year loan term by several years. Because the payments are spread out instead of making one (large) 13th payment, it’s likely you won’t even notice the extra expense.

Source: https://wfgconnects.com/blancasepulveda/blog/which-debt-should-you-pay-off-first

How To Save For A Big Purchase

It’s no secret that life is full of surprises. Surprises that can cost money.

Sometimes, a lot of money. They have the potential to throw a monkey wrench into your savings strategy, especially if you have to resort to using credit to get through an emergency. In many households, a budget covers everyday spending, including clothes, eating out, groceries, utilities, electronics, online games, and a myriad of odds and ends we need.

Sometimes, though, there may be something on the horizon that you want to purchase (like that all-inclusive trip to Cancun for your second honeymoon), or something you may need to purchase (like that 10-years-overdue bathroom remodel).

How do you get there if you have a budget for the everyday things you need, you’re setting aside money in your emergency fund, and you’re saving for retirement?

Make a goal
The way to get there is to make a plan. Let’s say you’ve got a teenager who’s going to be driving soon. Maybe you’d like to purchase a new (to him) car for his 16th birthday. You’ve done the math and decided you can put $3,000 towards the best vehicle you can find for the price (at least it will get him to his job and around town, right?). You have 1 year to save but the planning starts now.

There are 52 weeks in a year, which makes the math simple. As an estimate, you’ll need to put aside about $60 per week. (The actual number is $57.69 – $3,000 divided by 52). If you get paid weekly, put this amount aside before you buy that $6 latte or spend the $10 for extra lives in that new phone game. The last thing you want to do is create debt with small things piling up, while you’re trying to save for something bigger.

Make your savings goal realistic
You might surprise yourself by how much you can save when you have a goal in mind. Saving isn’t a magic trick, however, it’s based on discipline and math. There may be goals that seem out of reach – at least in the short-term – so you may have to adjust your goal. Let’s say you decide you want to spend a little more on the car, maybe $4,000, since your son has been working hard and making good grades. You’ve crunched the numbers but all you can really spare is the original $60 per week. You’d need to find only another $17 per week to make the more expensive car happen. If you don’t want to add to your debt, you might need to put that purchase off unless you can find a way to raise more money, like having a garage sale or picking up some overtime hours.

Hide the money from yourself
It might sound silly but it works. Money “saved” in your regular savings or checking account may be in harm’s way. Unless you’re extremely careful, it’s almost guaranteed to disappear – but not like what happens in a magic show, where the magician can always bring the volunteer back. Instead, find a safe place for your savings – a place where it can’t be spent “accidentally”, whether it’s a cookie jar or a special savings account you open specifically to fund your goal.

Pay yourself first When you get paid, fund your savings account set up for your goal purchase first. After you’ve put this money aside, go ahead and pay some bills and buy yourself that latte if you really want to, although you may have to get by with a small rather than an extra large.

Saving up instead of piling on more credit card debt may be a much less costly way (by avoiding credit card interest) to enjoy the things you want, even if it means you’ll have to wait a bit.

Source: https://wfgconnects.com/blancasepulveda/blog

Why You Should Pay Off High-Interest Debt First

Credit card debt can be sneaky.

Often, we may not even realize how much that borrowed money is costing us. High interest debt (like credit cards) can slowly suck the life out of your budget.

But paying down high-interest debt can free up cash flow in a big way. It might take time to produce a meaningful return. Your “earnings” will seem low at first. They’ll seem low because they are low. Hang in there. Over time, as the balances go down and more cash is available every month, the benefit will become more apparent.

High Interest vs. Low Balance
We all want to pay off debt, even if we aren’t always vigilant about it. Debt irks us. We know someone is in our pockets. It’s tempting to pay off the small balances first because it’ll be faster to knock them out.

Granted, paying off small balances feels good – especially when it comes to making the last payment. However, the math favors going after the big fish first, the hungry plastic shark that is eating through your wallet, bank account, retirement savings, vacation plans, and everything else. In time, paying off high interest debt first will free up the money to pay off the small balances, too.

Summing It Up
High interest debt, usually credit cards, can cost you hundreds of dollars per year in interest – and that’s assuming you don’t buy anything else while you pay it off. Paying off your high interest debt first has the potential to save all of that money you’d end up paying in interest. And imagine how much better it might feel to pay off other debts or bolster your financial strategy with the money you save!

Source: https://wfgconnects.com/blancasepulveda/blog/why-you-should-pay-off-high-interest-debt-first

Should You Live With Your Parents?

Plenty of people move back in with their parents.

Data found that 37% of Californians and close to 1.9 million people in Canada between 18 and 64 live with their parents (1 & 2). That might not sound ideal, but is it really that bad? Here are some pros and cons to consider before deciding to move back home.

Pros
Living with your parents isn’t necessarily the end of the world. For starters, it might be cheaper than renting an apartment or buying a house, depending on the deal your parents offer you. Negotiating rent with your mom is typically easier than wrangling with a landlord! On that note, at home you’ll be surrounded by people who love you. That can be a serious boost to your mental health and give you some footing for your next move. And you can’t forget that free food is awesome. (If that’s part of the deal!)

Cons
But moving back in might not necessarily be all rainbows and sunshine. It can be incredibly demoralizing for many people. We tend to estimate our self-worth and how much we’ve accomplished by our independence from our parents. It’s easy to see living with our parents as a step back. Plus, it can encourage laziness. Not having to hustle for food and rent can remove a sense of urgency from your work. Nothing motivates you quite like the imminent threat of bankruptcy!

If you have to move back in with your parents, do it with a plan. Maybe you give yourself six months at home to get your business off the ground. Your goal might be more long-term like caring for a parent. Just remember to take it in stride and don’t let it derail your life!

Source: https://wfgconnects.com/blancasepulveda/blog/should-you-live-with-your-parents

Healthy Financial Habits

Consistency is essential for anything, and the key to consistency is habit.

Habits are behaviors that we do so frequently that they feel second nature. So your friend who’s woken up at 5:00 AM to work out for so long that it seems normal to him? He’s unlocked the power of habit to wake up, get out of bed, and make it happen.

Healthy money habits are the same way; they open up a whole new world of financial fitness! Here are a few great habits you can start today.

Begin with a Budget
Developing a budgeting habit is foundational. Consistently seeing where your money is going gives you the power to see what needs to change. Notice in your budget that fast food is hogging your paycheck? Budgeting allows you to see how it’s holding you back and figure out a solution to the problem. The knowledge a budget gives you is the key to help you make wise money decisions.

Pay Yourself First
Once you’re budgeting regularly, you can start seeing who ends up with your money at the end of the day. Is it you? Or someone else? One of the best habits you can establish is making sure you pay yourself by saving. Instead of spending first and setting aside what’s left over, put part of your money into a savings account as soon as you get your paycheck. It’s a simple shift in mindset that can make a big difference!

Automate Everything
And what easier way to pay yourself first than by automatically depositing cash in your savings account? Making as much of your saving automatic helps make saving something that you don’t even think about. It can be much easier to have healthy financial habits if everything happens seamlessly and with as little effort as possible on your part.

Healthy financial habits may not seem big. But sometimes those little victories can make a big difference over the span of several years. Why not try working a few of these habits into your routine and see if they make a difference?

Source: https://wfgconnects.com/blancasepulveda/blog/healthy-financial-habits