Step 5: Pay off Consumer Debt
What is consumer debt?
Consumer debt is any money owed with the exception of the mortgage on your primary residence. Credit cards, personal loans, payday loans, car loans, and student loans are just a few examples.
Why pay off consumer debt?
There are several reasons why we believe paying off debt is important in the process of building wealth. Debt from an emotional perspective has been described as a weight on the borrower's shoulders or a weight chained to the ankle; it slows down your progress. Debt constantly lingers in our minds and can create financial stress. Debt from a decision-making perspective represents restriction to choices that would otherwise be open to us without debt. Debt from a financial perspective is going backward because it subtracts from net worth and consumes income through interest payments that would otherwise be applied to building wealth. Saving and investing has risk, but the potential rewards are earning interest and added income. In comparison, having debt is a guaranteed loss as it is paying someone else interest.
How do I pay off consumer debt?
There are many methods you can find in paying off debt; however, they all boil down to following a plan. As part of Step 1 in the Process Ladder, you should have a list of all of your liabilities. Take all of your debt except your mortgage and list them in an order that works best for you. We suggest working from smallest to largest. Paying off your smallest debt will give you a quick win and keep you motivated to continue paying off your debt. Anything you can squeeze out of your budget, primarily the wants category of your budget, should be applied to your consumer debt until all of your debt is paid off. Remember to celebrate the wins so you don’t burn yourself out. We are here to hold you accountable.