"I would like to pay down my debt, but... what should I pay down first?"

Given the low rates of return on investments these days, for most of us it means we are losing money each month. If your savings are earning you 3% and your debt is costing you 5% it is not hard to see how you are actually losing money. If you are less risk averse and your investments are all in the stock market you still need to be earning more than a 5% return on your investments to balance out.

Pay High Interest Debt First

Paying interest is expensive. In addition to the actual expense, also consider the fact your interest payments are made with after tax dollars. Interest payments, especially high ones, will slowly eat away at any financial gains you make. It is time to take a hard look at your debt and your expenses to figure out a way to reduce both so you can get ahead financially.

Pay down your debt with the highest interest rate first. Continue to make the required payments on your other debt but if possible make extra payments on the highest rate debt. Once the debt with the highest interest rate is paid off, move your extra payments to the debt with the next highest interest rate and so on. Take any financial windfalls or lump sums and pay down debt.

Consider applying for a consolidation loan if you are carrying credit card balances and other high interest rate debt. Likely you will get a lower interest rate. It will be tempting to take the extra money you save to improve your cash flow each month. But before you do, work out your budget. If you can afford to make higher payments on your consolidation loan then do so.

Debt Control

This is a bit of a balancing act; make sure you are not making yourself short each month so you need to use your credit cards to get through to pay-day. In fact, after the balances are paid off, cut up your credit cards; lock them away, do whatever you need to do to not use them. Keep the credit card with the lowest rate as your emergency card. Emergency does not mean a new pair of shoes or iPhone. Only use your card when you can afford to pay off the balance when the bill comes in.

If you are diligent and stop adding to your debt each month you will start to see a real difference in the amount of money in your pocket. Many people like to keep track of the amount of interest they pay each month. Watching the amount decrease is often incentive enough to keep at it. Remember every dollar you do not pay in interest charges is a dollar you can invest to improve your wealth.

If you must borrow make sure it is good debt you are taking on and not bad debt. Good debt is used to increase the value of an asset. Examples are borrowing for education, home improvements and some investments.

Depending on your financial situation, it may make more sense to pay down your debt rather than making a RRSP contribution or add to your savings/investment accounts each month. Every situation is different so it is critical you speak with a financial advocate at The Credit Union to make sure your debt reduction plan is the best for you. We C.U.™ so you can get debt free faster.