Most of us would like to be free of debt. That's why stories
of regular people paying off thousands are so inspiring: If they can
do it, maybe we can, too. However, before setting our sights on completely
paying off our mortgage or eliminating every cent of our student loans years
ahead of schedule, it's important to meet any other debts that might
take priority, explains certified financial planner and certified public
accountant Jordan Niefeld from Raymond James Financial.
You should always be making at least minimum payments on
your debts, so before committing your cash to make extra payments on a
single debt, here — listed from most to least urgent — are the debts Niefeld
recommends making sure you can cover.
1. Housing costs
You need to be able to pay your mortgage every month. If you
have a mortgage, that should be your first priority. This includes second mortgages
or home equity loans. If you fall behind, you will not only ruin your
credit, but your bank may be able to foreclose.
2. Property taxes and
Property taxes and insurance are also non-negotiable. Housing
costs include your property taxes and insurance. If you don't pay your property
taxes, there will be tax liens and [the taxing authority] can come after
you. Even if the taxing authority takes possession of your home, you're still
going to owe the mortgage. Bottom line: Always maintain your property tax.
3. Other secured
debt, such as auto loans
To keep your, car, keep paying your loans. A secured debt is
one where the lender issues some type of collateral, like a car (or house), as
opposed to unsecured debt based on the borrower's agreement to repay, like
credit card debt. Niefeld explains that secured debts should take priority over
unsecured debts. For instance, with an auto loan, enough missed debt payments
could lead to your car being repossessed. That could have a significant impact
on your ability to maintain an income and meet your debt obligations.
4. Federal income
Don't run afoul of the IRS. Federal income taxes are urgent
for the same reason as your property taxes — the IRS can pursue you for
them. Understand that the IRS has the authority to repossess your assets,
whether that's a house, boat, bank account, rental income ... it can go as far
as garnishing your wages. Always maintain proper records. The IRS always wants
you to file first, even if you can't pay. They're much more concerned about the
paperwork, and penalties are much higher for people who don't file the paperwork,
even if they can't pay.
5. Student loans
Both federal and private student loans need to be paid. Federal
student loans also have the power of the IRS behind them. Whether direct or Stafford,
if you default, the IRS can go as far as taking your tax refunds to
cover the payments. Private student loan
payments are also urgent. Private loans are the most dangerous student loans
for a variety of reasons. Often, they have variable interest rates, require a
cosigner, may not be consolidated, are ineligible for deferment or forbearance,
and have limited repayment options. If you die before repayment in full, the
loans becomes due — which is why, if you have a cosigner, you should
consider having life insurance to cover the amount of debt you have in
private loans. For these reasons, private student loans should be a priority.
Niefeld points out that in the case of student loans, it's
wise to budget for more than a minimum payment, in order for your money to
whittle down the principal, not just the interest.
6. Medical bills
Hospital bills can seem unmanageable, but it's important to
keep up with payments. Medical bills are one of the leading causes of
bankruptcy in the US. The hospital can sue you or send the debt to collections.
7. Unsecured debt,
such as credit card debt
Credit card debt is expensive. Unsecured debt — the kind
without physical collateral — is low on the list because, although frustrating
and expensive, this kind of debt doesn't immediately threaten your home or job.
That doesn't mean it isn't important to pay: Credit history is so critical and
vital to everything we do in life. It follows you wherever you go, from renting
an apartment to purchasing a cell phone plan, it will follow you. It's real and
He recommends tackling unsecured debts from highest interest
to lowest (by eliminating the most expensive debts first, you'll pay less over
the long run than you would were you to start at the other end) but also
recognizes the effectiveness of the "debt snowball" method popularized
by financial personality Dave Ramsey, where borrowers tackle the smallest debt
first and use the psychological momentum to pay increasingly larger balances.
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