How Intensely Should You Destroy Your Debt?

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. 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 with 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 they normally carry a high interest rate. You’d want to make some fairly extreme financial 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 as you must only incur them within reason.

For instance, I’d only off pay car loans slowly if you’re using arbitrage to earn extra interest with the cash you would have used to pay for the car by keeping it in a high interest bank account. After all, 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?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.


  1. Rita P @ Digital Spikes says:

    Yeah, I agree with you that many people go crazy about their debts Lance. I have set my payday in my calendar and make sure I keep my debt amount apart so that I should not worry about it during payday. I use credit cards very carefully so that I do not bear that burden due to that impulse shopping.

  2. I HATE debt but I would never cash out my 401K to pay it off! We did pay off our debt pretty fast but we didn’t complicate matters by putting our retirement funds on the line.

  3. Wow! I wouldn’t go to such extreme lengths to get out of debt! But I did stop buying what I don’t need and that added up to $1000 a month in eating out.

  4. Extreme anything is not sustainable! I think you should pay down debt as quickly as possible, but yu should also save and invest. Time in your investments is meaningful! If you miss that opportunity , it is difficult to catch up. My opinion is you should do both.

  5. In practice I fall on the Ramsey side of the equation (Debt is Bad, Just Bad).

    I set some money aside for emergencies and I use two funds for expenses. Cash: for groceries, gas, clothes and the occasional ice cream cone. And Bills: for the electric, water, insurance and such. The rest gets dumped into my only debt, the mortgage.

    Philosophically, I have no aversion to debt. I’m quite happy to have taken the mortgage. Paying rent until I saved enough cash would have cost a great deal more than the closing costs, interest, taxes, and insurance I pay. And it immediately lowered my monthly expenses.

    High expenses is my real aversion – which is what tips me to Ramsey’s side in practice.

    • And I think tapping a 401K at what is presumably a higher cost than the interest on the loan doesn’t seem to make sense. But, if getting that loan payment out of the budget was the only way to make ends meet, and the 401K the only asset available, then I think I’d even do that. Assuming of course defaulting on the loan had serious repercussions of its own, like a mortgage loan.

    • Our interest expense on our mortgage is reasonable. Throwing the amount of money we’d have to to get it down to nothing just doesn’t make sense to us when inflation should help us out over the next 29 years.

  6. I do have $25,000 combined in student loans above 6% fixed interest. I am rushing to pay those down. After that though, I agree that it’s better to pay the minimum and maintain that excellent payment history on your credit rating while saving for retirement and a down payment on a house.

  7. I’ll probably get some flack for saying this, but I don’t think paying off your debt quickly is always a good thing. For example, some debts may have very low interest rates – where you are financial better off making minimum payments. Also, you still need to have fun – if you use all your income to pay down debts, you might just miss out on the best years of your life!

  8. Rita P @ Digital Spikes says:

    Paying off debt is important and you must balance your saving and debt paying. Having emergency fund apart from saving is equally important

  9. We are pretty balanced in our approach to debt, I think. We attacked our higher interest loans and are now to the point where all we have is our mortgage at 3.25%, and that we are in no rush to pay off.

  10. “Live In a Van to Pay Off Debt? No Thanks!”

    LOL I just saw the caption. In a sense I do just that. You should see the cheap little house I live in. 🙂 Only in my case, I do it to avoid as much expense as I reasonably can so I don’t end up in a van.

  11. Debt and the Girl says:

    I believe in paying down debt. I think you would be hard presses to find a PF blogger worth his/her salt who disagrees but I also believe in living your life. For instance, I am paying off my student loans but I am not in panic mode either trying to pay them off. I don’t enjoy the taste of ramen every night for dinner.

  12. My mom always told me any debt is bad debt! Unfortunately, that’s not really realistic, but this is at least a good guide to see what you should attack first!

  13. Kendal @HassleFreeSaver says:

    I agree emptying your 401K and paying penalties to pay off debt is a bad move. Ultimately, living lean to make up for past transgressions is the ideal way to attack debt because you’re still saving for retirement, which is important. Great post!

  14. I agree with you on this. My husband and I worked hard to pay off our credit card debt, but didn’t over-do it. We are now current with it (woohoo!). We are continuing to pay down our mortgage and my student debt (which is really quite small compared to others) as we normally would. The main reasons we are doing this is because we are both quickly approaching full retirement age and really need to beef up our retirement funds. We both have full-time jobs that we will probably stay at for the remainder of our working lives. Plus we can continue to declare the interest on our mortgage and loan on our taxes. If that ever changes then we will re-visit this strategy.

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