Which Debt Should I Pay Off First?
Posted by Bonnie on September 22nd, 2008 filed in Debt and Loans| There is good debt and bad debt. Good debt is called good debt because it is tax deductible if you itemize your taxes. This includes mortgages, some types of student loans and business loans.
It makes no sense to speed up paying off low-interest, tax-deductible debt if you have any other kind of debt. You should first pay off your highest-rate, nondeductible debt first. Do not pay more on your mortgage at the expense of not saving more for retirement. The sooner you start saving for retirement the more you will save because of compounding. Plus you can’t get back an opportunity to contribute to a tax-advantaged retirement plan once you have missed your chance. Withdrawing from your retirement early should never be considered. The money you will lose in the long run, plus the taxes and penalties that you will have to pay now make this a very bad choice. You will sacrifice 1/4 to 1/2 of what you withdraw to taxes and penalties. Borrowing from your retirement is a bad idea also. An additional risk to borrowing from your 401(k), is if you lose your job, you have to pay back the loan in a short amount of time or it will be taxed and penalized as a distribution. |
 A Mortgage is  Credit Cards are |
If things get really bad and you end up in bankruptcy, the credit card debts can be wiped away. You don’t want to risk losing your retirement money also.
Focus on paying off bad debt which consists of credit cards, unsecured loans, and loans that are not tax deductible. Start with the highest interest bad debt and pay more towards it each month until it is paid off. Then focus on the next highest.
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September 22nd, 2008 at 7:31 pm
Mathematically speaking, it is best to pay off your debts with the highest interest first. But often times, many people get discouraged and overwhelmed with the amount of debt they have so paying off the small debts first is recommended. This way the person feels the success of repaying debt and will have a more confident perspective regarding debt payment.
Remember: mind over matter!