Tank #3: Payoff Bad Debt
Debt sucks. It piles up over time. It started before you knew what it was. It’s frustrating. It’s not your fault. Well, maybe it’s a little your fault. It doesn’t matter. It’s in the past. But remember this feeling. You don’t want to have this feeling again.
With your 1-month emergency fund, you’ve protected yourself from adding to your debt. That’s comforting. Now it’s time to get free of bad debt. But which ones should you pay off? What’s the right order? Is it okay to just make payments on any of your debt? Tank #3 will give you a guide.
In Tank #3, you will pay off bad debt while making payments on the not-so-bad debt. This is a balanced approach. This approach allows you to enjoy today and get on track for your future. I know some advisors suggest you pay off all your debt. I don’t. I don’t think it’s realistic. It leads to burnout and relapse. Instead, in Tank #3, you use your fuel to pay off the debt that will drown you while making payments on debt that’s manageable.
Here are the two types of debt:
Bad Debt – Pay these off to complete Tank #3
- Mob debt
- Payday loans, Title loans and other super high interest debt
- Credit cards
- Private student loans
- Medical debt
- Tax debt
- Retirement plan loan
Not-so-Bad Debt – Keep making payments until Tank #7
- Federal student loans
- Auto loans
- Home equity