Mutual Funds

Prioritizing Debt

How to decide which debt to pay off first.

Debt is one of the most common enemies of retirement savings. If you don't have enough to save for retirement each month due to a stack of credit card bills or burdensome loan payments, it's time to get serious about paying down your debt. But where do you begin? Take note: All debt is not created equal. Some debts are costing you much more than others, most often because of high interest charges. It's time to single out the "bad debt" and pare it down.

Here Are Five Steps to Prioritize Your Debt:

  1. Make a list of all your outstanding debts. For each, note the total amount you owe, the current interest rate and the minimum monthly payment.
  2. Next, rank the debts by the rate of interest you pay each month. Typically credit cards and car loans have higher interest rates than mortgages and student loans.
  3. Begin paying as much as you can each month on the higher-ranked debts while still covering minimum payments for the others.
  4. Continue this process for each debt, and try to avoid taking on new debt unless it is absolutely necessary.
  5. Once you have eliminated your high-interest debt, set up an emergency fund with around six months of expenses. Then transition savings to retirement accounts.