January 5, 2011
Step #3 - Pay Down Your Small Debts First
To get to this step you should be on board with the ideas of "Spend Less" and "Save More." Another way to save is by not having to pay interest, which means reducing or eliminating your debt. There's nothing wrong with debt, most people could never buy a house without getting a mortgage loan. But too much debt makes you a slave to your payments. And if you have debt - mortgage, car loan, student loan, credit card - chances are good that you can't pay it off overnight. Conventional wisdom suggests that you focus on your highest cost (read: highest interest rate) and pay that down most quickly.
Makes perfect sense. But if you have multiple debt payments and have the ability to pay extra on some or all of them, ignore the interest rates and think of this: you're a firefighter with a firehose, and there are 4 or 5 fires burning. You point the hose at each one for a few seconds or minutes, but it can be hard to put a particular fire out if you share the water around equally. Let that hose linger a bit on the smallest fire. Once that one is out you'll have one fewer to worry about and can focus on getting the others put out. That will be easier because you will have one less payment to make - you can keep that hose pointed at the other fires.
Next #4: Percent - Not Dollars
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).