Have you read the stories about crazy people who paid off their debt as quickly as possible but suffered majorly in order to do so? I’ve come across some insane stories of people who have cashed out their 401(k)s and paid huge penalties to pay off low interest rate student loan debt.
That’s pretty extreme and I personally wouldn’t recommend it. It does raise an interesting question though. Where do you draw the line between extreme debt payoff at all costs and a healthy dose of pain you need to suffer due to the reality that you’re in debt?
How Crazy Fast You Must Attack Your Debt
The first major factor in determining how crazy fast you need to attack your debt is the interest rate and type of debt you have. If you have a payday loan (insane interest rates!) you need to destroy your debt like it is your mortal enemy. There are no excuses. You must realize that these types of debts can destroy your life in no time flat and lead you down the path of financial ruin. Do whatever you can to get rid of these loans as fast as possible.
Credit cards are another type of debt that you must take seriously as it is normally at a high interest rate. You need to try to get rid of this type of debt pretty quickly as well. You’d want to pull out a lot of strange moves to get rid of the high interest rate credit card debt, but there are a few things I’d probably avoid doing. For instance, I wouldn’t pull money out of my 401(k) to get rid of this debt. You likely lived above your means in order to get into credit card debt, so it is time to pay the price now and live a not so plush life until it is gone.
Where Debt Destruction Gets A Bit Fuzzier
Things get a bit fuzzier after payday loans and credit cards. How intensely you should destroy your debt varies greatly depending on your personal situation and your intolerance for debt. There are some types of debt, such as low fixed interest rate car loans, student loans and mortgages that I probably wouldn’t pay off quickly.
These types of debt should all be carefully considered before you incur them and you must only incur them within reason. With car loans, I’d only pay them off slowly if you’re using arbitrage to invest the money you were going to use to pay for the car in cash with. I don’t advise buying cars you couldn’t pay for in cash.
Student loans are unfortunately another type of evil debt that many people face. If your interest rates are fixed at or below 4% I wouldn’t be in a rush to pay them off. In fact, I’d probably pay them off as slowly as possible, but that’s just me. If your student loan interest rates are 6% or higher I’d probably try to pay them off more quickly than the normal term of the loan agreement. You don’t have to go all or nothing toward these types of debt unless the interest rates or total debt owed are insane.
The Largest Debt You’ll Likely Ever Incur
Mortgages are extremely common when buying a house as very few people can afford to pay cash. As long as you’ve bought a house that was well within what you can afford and your fixed interest rate is 5% or lower, I wouldn’t be attacking your mortgage debt unless it keeps you up at a night. Just make sure that you’re not paying PMI, which normally requires putting down 20% when you first buy your house.
However, if you aren’t going to invest the money that you could use to pay down your mortgage faster, then you may want to consider paying down the debt. Paying down debt increases your net worth and reduces your the amount you owe to others, while spending the extra money frivolously won’t further your financial goals. Make sure you’re always working toward bettering yourself financially.
What is your take on how intensely people should destroy debt? Does it matter what type of debt it is?