Let’s be honest, when you are up to your eyeballs in debt it is often quite difficult to figure out what to tackle first to get the ball rolling toward debt free living. In fact for individuals facing a financial hardship or very high levels of debt the thought of living debt free is hard to visualize as a reality. Unfortunately this mentality is one of the things that makes it impossible for some people to focus on reducing and eliminating debt. After all, if you don’t believe you will ever overcome your current financial situation, why bother-right? Wrong…debt will stay with you forever, long after the statute of limitations expires and even after it falls off your credit report. For this reason it is vital to get out of debt and everyone is capable of this feat. One of the first steps on your journey to financial freedom is prioritizing your debt and developing a strategy to help you reach your goals.
What Should You Pay First?
If you are in a position where more money is going out than coming in, deciding what to pay first can become a bit tricky. There are people that simply do not have enough money to cover all expenses in their life. Regardless of how you found yourself in this position, it is important to stop the hemorrhaging of money and get control over your finances immediately. Doing nothing (while a common reaction) is not going to help your situation and you will eventually find yourself in a worse position than you currently face. The following information can help you sort out what to pay and when. Remember to keep the lines of communication open with creditors; they may be able to offer options you had not thought of yourself.
- For people who are truly facing a financial hardship, survival has to be the first priority. While it may sound cliché, it is imperative to first make sure you have a roof over your head, food on the table and utilities needed to live. If you must have a vehicle to get back and forth to work, then paying your car note and/or keeping your car on the road is important to ensure you have transportation to your place of employment.
- As a general rule, secured debt should be paid before unsecured debt. If you are unsure of the difference, secured debt is held by an asset that is used as collateral. Failure to pay secured loans will result in a lien on your asset or possible repossession or seizing of said asset.
- Unsecured debt (usually credit card debt) does not require a form of collateral, therefore your assets will not be seized, at least not right away. Eventually non repayment of unsecured debt might lead to legal action taken against you which could result in a lien on assets or seizure with proceeds going toward debt owed. Regardless, paying secured debt should top paying unsecured debt in most cases.
When it comes to paying off debt, knowing what to pay is just the first step. You must also analyze your expenses and find areas where you can cut unnecessary spending. If you don’t already have a budget, you should establish one immediately to help you track and eliminate excess costs, which will allow you to save more money for debt repayments. It is certainly not easy to get out of debt, but staying in debt in not an option which makes it important to start the process without further delay.
Trisha Wagner is a freelance writer for DepositAccounts.com, where you can compare rates of checking accounts from dozens of banks in one place. Trisha writes regularly on the topics of personal finance and savings accounts.
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