You are engaged in a war with a persistent and powerful enemy: Debt. Credit card debt, home mortgage, student loans or a combination of those can be a vicious enemy. You need a plan of attack, a strategy to tackle this nemesis. Here’s your playbook; which approach you take matters less than which approach you can stick with.
You can’t rush into battle without appropriately assessing the situation. First and foremost, you need to know just how much debt you have and to whom you owe it. Add up all your debt from your mortgage, loans and credit cards. Determine how much money you can afford to dedicate to debt repayment each pay period. Stop using credit as much as possible, since doing so is counterintuitive and self-defeating. Now you can choose a plan of attack.
For peace of mind, you may want to take the offensive against any collection efforts. You should always read any correspondence via mail from debt collectors, since they may offer to settle your debt for less than the full amount. Lawsuits are usually a last resort by collectors, and it will be more beneficial for you to settle before going to court, perhaps by paying a reduced amount or arranging a payment plan. The worst course to take is to ignore the court summons entirely, since the judgment will almost certainly go in favor of the collector.
From a pure dollars-and-cents standpoint, you’ll save the most money on interest charges by paying off the debt with the highest interest rate. You will make progress on repaying debt much more quickly if you can penetrate the defense of the interest and actually hit the principle. Otherwise you’re fighting a losing battle, where the principle is always sending reinforcements in the form of interest.
If you have difficulty keeping your motivation toward your goal, or if you just like to see your progress, you could approach repaying debt by paying the smallest balances first. Seeing the debt paid in full is encouraging and keeps you on track. If you make monthly payments to several different creditors, paying off small balances can help simplify the process and more easily keep track of payments.
There are a few plans that will likely fail you. Paying off credit card debt won’t help you if you haven’t addressed the spending habits that enabled you to fall into debt in the first place. Your emergency fund shouldn’t be a source of funding for debt repayment. Spending from emergency savings leaves you vulnerable to further potential of financial trouble. Your 401k is another source you shouldn’t touch to pay off debt. You’ll pay hefty penalties for early withdrawal and you lose the progress you made towards a secure retirement.
Each tactic has advantages and drawbacks, and a failed attempt may require retreat and regrouping. This is not a failure, only a temporary setback. The worst possible approach is to do nothing.