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How to Prioritize Your Debt

            Covering your essentials and tackling financially-damaging debt

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When it comes to managing debt, single moms have extra struggles to deal with. But we manage to overcome those hurdles and keep making strides to pay off debt and build net worth.

Then 2020 happened, and for many of us our financial progress got knocked off track. According to a survey by Lending Tree, 56% of parents have gone into debt during this Covid crisis… and it’s even harder on single moms.

But that doesn’t mean we can’t win this battle, too. We are resourceful and determined. We will not stop working toward a more secure financial future for ourselves and our kids. And dealing with our debt is a huge part of that.

Competing priorities in paying down debt

Now more than ever, the first step toward tackling debt is to prioritize it. In normal times, you’d focus on the fastest pay-down methods to shed your debt. But now you have to balance two important factors: which debts are essential to your life, and which do the most damage to your net worth. Unfortunately, the most essential and the most damaging debt usually won’t be the same.

And right now – in 2020 – essentials come first for most of us.

That doesn’t mean you should ignore the debts that gobble up your net worth. You still want to chip away at them, because that frees up more money and financial space going forward. It’s just that the debts related to your family’s well-being take first priority.

Remember: No matter which debts have the highest priority, do your best to make the minimum payment on every debt every month so you don’t go into default. If you can’t manage minimum debt payments, read this blog post to see the steps you need to take to avoid bigger problems.

Prioritize: The Most Essential Debts

When you’re faced with financial uncertainty, your family’s security tops everything else. That means that any debts linked to your home, health, and safety come first.

High-priority essential debts include the debts that would change your life in a negative way if you didn’t pay them. Mortgages and home equity loans rank number one here, because if you don’t pay those you can lose your house. Car loans come in second, because you can’t get to work, school, or the doctor if your car gets repossessed. These debt payments take top priority all the time, but especially when your budget tightens up.

Once you have those essentials covered, you’ll figure out which other monthly payments rank high to keep your life and your finances on track. Using the essential priority sort order, your highest-ranking debts include:

  • Mortgage, home equity loan, HELOC, and rent
  • Car loans or leases
  • Electricity, gas, water, phone, and internet
  • Income and property taxes
  • Other secured debts (debts backed by property that can be repossessed, like if you got a personal loan with your car as collateral)

Utilities and taxes may not feel like debts, but they count. You owe that money. Having your utilities shut off would make your home unlivable. Skipping tax payments could result in losing your home. And even though they’re debts, food and medical care also rank as top priorities, coming before other debt payments and bills.

Lower Priority Debts Won’t Affect Your Living Situation

The next debts on your essentials list have medium priority: They won’t affect your daily life (at least not right away), but not paying them can lead to much bigger financial problems. Medium priority debts include things like health, homeowner’s, and car insurance and student loans (because they can affect your income tax refund).

The lowest priorities on the essentials list include things like:

  • Credit cards
  • Merchant accounts (like store credit cards)
  • Medical bills
  • Legal bills
  • Unsecured personal loans

Missing payments on these debts can result in fees and penalties, extra interest, and a dent in your credit score… but you won’t lose your house and your lights won’t get turned off.

Prioritize: Financially Damaging Debts

If you’re able to cover all of your bills, you’ll want to focus on financially crushing debts.  

Debts with the highest interest rates do the most damage to your net worth and financial future. In most cases, these debts are unsecured, meaning they aren’t backed by collateral like a house or a car. That’s why they rank low on the essentials priority list. But on the flip side, your creditors have nothing to repossess or foreclose on if you don’t pay, so they charge you higher interest rates to make up for that extra risk.

When you’re ready to gear up and tackle your debt permanently, you’ll want to start with high-interest, financially damaging debts. Priority-wise, you’ll rank these debts by their interest rates, from highest to lowest. The amount you owe is less important than the interest rate here. Paying these off will save you tons of money in interest payments. And the money you save on high-rate interest can be used to pay off less financially damaging debts faster.

The most financially damaging debts include:

  • Payday loans and other toxic debts
  • High-rate personal loans
  • Credit card debt

It can be very hard to get out from under this kind of debt, but you can do it.

Pay Off Toxic Debt ASAP

Debt that comes with insanely high interest rates – anything more than 36% per year – is toxic and needs to be paid off as quickly as possible. Toxic debts destroy your current finances and sabotage your financial future. They include things like payday loans and high-rate personal loans. When you have no other good options, these loans can help you stay afloat. But avoid payday-type loans if you can, and make sure you 100% understand the terms if you do need to borrow this way

Paying off these toxic debts may feel impossible, but you can do it. And as you pay them off, both your budget and your net worth will benefit, and so will your financial stress levels. Once you’re free of toxic debts, you can turn your attention to personal loans and credit card debt.

Credit Cards and Minimum Payments

When you make only minimum payments on your credit card bills, you’ll be stuck in debt longer and pay thousands more in interest. Paying any amount more than the minimum payment – even just $5 more – every month will reduce the interest you pay over time.

You’ll also save more on interest by making two payments every billing cycle: one right away, and the other a week before your payment due date. Just split your minimum payment – plus a little bit extra if you can – into two separate payments. Credit card interest gets charged on your average daily balance, so making an early payment reduces that average and the interest you’ll be charged.

Figuring Out Your Combined Priority List

You can see how these two ways to prioritize leave you with opposite lists. Your next step is to take a look at the money you have available to work with. When your funds are limited, make sure you’re survival expenses are covered before you move down the priority list. If you can cover all of your top-priority essentials, you have some flexibility over what to focus on next.

When you have financially damaging debt, it makes sense to try and tackle it as soon as you can. So, for example, before you throw extra money at your mortgage or student loans, put it toward paying down credit cards.

The key is to know your priorities and make a plan that serves them. And if your priorities and plans change, you can use all of your single mom super skills – like adaptability, flexible  thinking, and problem solving – will help you figure out next steps.

You can find more ways to prioritize debt… supercharged pay down strategies… and the fastest ways to repair a damaged credit score in my book Debt 101.