Should debt repayment always be your number one priority? Some financial wellness experts have made a living by helping people put their debt repayment above just about everything else in their life. But I respectfully disagree with them. I’m not so sure debt repayment should always be your number one priority.
As I’ve shared before, after graduate school student loan debt repayment was my number one priority. I put it before retirement savings, saving for my wedding, long-term emergency savings, and so much more. I didn’t allow my lifestyle to shift much when I got my first full-time job because I wanted to put any extra money toward debt repayment. The truth of the matter was, I was repaying an average amount of federal student loans (around $30k) with an average interest rate (around 6%). The Standard 10-Year Repayment Plan suited my budget just fine, but I was determined to put in more. Looking back, I wonder: Did I need to? Was there more money I could have put toward other goals? Were there opportunities I missed out on because I was so singularly focused on this one goal?
After about 4 years, my husband and I decided to shift this strategy to include some other important financial goals (retirement savings, long-term emergency savings, house updates, and travel) at the same time we were working on our debt repayment. By this time, “I” had become “we” and we had added my husband’s student loan debt to our household budget. We knew that as much as we wanted to make debt repayment our number one goal, if we did that we’d be missing out on countless financial opportunities and setting ourselves back on numerous important financial goals. We decided to make debt repayment a priority but remove it from the top position.
Remember, not all debt is created equal. High interest credit card debt that’s costing you lots of money month after month doesn’t have the same impact as a low interest revolving car payment. Similarly, debt (no matter the amount) doesn’t weigh on all of us equally. You may be someone who aspires to be debt-free as soon as possible, or someone who believes a relatively small amount of debt isn’t so bothersome. You have a choice as to how much you prioritize your debt and the pace at which you repay it, and it’s ok for that pace to change over time. Keep that in mind as we dive into the last few steps to repay any debt. If you missed How to Repay Any Debt (Part 1) from last week, I encourage you to check that out before reading ahead.
Evaluate Income and Expenses: In an ideal world, you’d live with a budget for a month or two to make sure it works for your actual spending patterns, but depending on your urgency to pay off your debt you may not have that kind of time. Take a look at the budget you’ve created and ask yourself these questions: Is there any unaccounted-for income (like bonuses, salary increases, or side hustle earnings) that you could put towards your debt? Could you shift any of your other savings priorities to put more money towards debt (i.e. could you save for a staycation instead of a vacation this year)? It’s generally not a good idea to reduce retirement or emergency savings, but you may be able to reevaluate other more discretionary savings goals. Last, are there 1-3 regular expenses you could reduce or eliminate to have more to put directly to debt repayment? Consider different scenarios until you find the right plan that works for your needs.
Tip: If you have a relatively small amount of debt and could pay it off in a few weeks or months, you might decide to make more drastic short-term changes to your budget or income. However, if you have a large amount of debt, it’s really important to consider your lifestyle. Would you be willing to give up these expenses for a year or more? Start by making small changes to your budget, checking in, and making more changes as needed to support your goals.
Snowball vs. Avalanche: If you have more than one debt you’re trying to pay off at the same time, you may also need to decide whether you want to use a debt snowball strategy (paying the smallest debt off first) or the debt avalanche strategy (paying the highest interest rate debt off first). While the avalanche strategy will save you more money over time, the snowball may give you more “early wins” to help you keep the momentum going.
Tip: Before you pick your plan, I suggest using an online calculator or spreadsheet to model different debt repayment strategies to see which one will be best for you over time.
Make a Repayment Plan: Evaluate all of the different levers you can pull and create a plan that works for your goals and needs. Remember, there’s no one-size-fits all approach to debt repayment that works for everyone — you’re making the choice that works best for you. Just because you decide on one repayment approach today doesn’t mean you can’t change it later. Instead of getting caught up in indecision, take a step forward with the goal of reevaluating your plan in a few months. But take note: There are a few bigger debt repayment decisions that you can’t go back on, like consolidation and balance transfers. You’ll want to do your research before choosing these options.
Tip: Need a little help crafting your repayment plan? Lutheran Social Service Financial Counseling can help you create a solid plan to repay your credit card and/or student loan debt. This is a free community service available nationwide. You do not need to be Lutheran to use this service.