You have some extra money, or you’re cutting back so that you can make some progressive financial changes in your life. Congratulations! Now comes the confusing part. Where do you put the money?
If you have debts, take a look at their rates of interest. You may have everything ranging from a zero-interest loan from family or a bank to a credit card that charges upwards of 18% in interest. These debts are not created equal. Ideally, you want to get rid of those that are costing you a lot of money in interest.
Take a look at your debts again. Do any of them have pre-payment penalties? Mortgage debt is one that often offers early payment only at a specific time of year, usually on the anniversary date of the mortgage. Weigh the costs and the benefits of early payment. If you have a debt that does not have prepayment penalties and has a high interest rate, that’s the one to choose.
Take a look for a third time. To me, mental load is also important. How many debts do you have? Does the number weigh on your mind and get confusing at times? You might consider paying off some of the smaller debts so that you have fewer things to pay off. Then ideally, cancel those accounts. If you have a credit card, you don’t need store credit cards as well. When you use a lot of store cards, it just makes repayment confusing and leads to a lot of time spent on bills and debt management.
If there is one debt in particular that weighs on your mind, give that some weight too. Perhaps it’s a $500 loan from a family member. Try to pay these debts back early in the game too, so that way your mind feels clear and you can focus more attention on debt repayment rather than feeling guilty.
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