There are lots of theories about how to best eliminate your debt, but the best one I’ve seen is the Debt Snowball Theory (The Simple Dollar has a good explanation of it). In short, you list all of your debts, ranking them by interest rate. You pay the minimum payment on all of them each month, but you also put an additional amount into the one with the highest interest rate. You keep doing that, until that first debt is paid off. Then, you take the amount you were paying on that first debt (minimum payment plus the additional amount you could scrape up) and that’s your new additional amount, which you pay into the second debt, on top of its minimum payment. You continue doing this, snowballing the amount into each debt, until they’re all paid off.
If you do the math, it’s the fastest and cheapest way to pay off all of your debts. And once I have income, I’ll be implementing it into my own financial plan. But, as it is with every person, I have a special situation. While my credit card debt easily falls into the plan, my other two debts do not.
The first debt, my student loan payments, doesn’t quite fit into the equation because I’m not making any payments yet. Depending on when I go back to school, I might not be making payments on them for years to come. I want to figure them into my equation, but that might not be the best idea. I could put a certain amount of money each month into my high-yield savings account, designating that money as future student loan payments. However, I would lose money that way, since the interest rate on my credit card is far higher than the interest I would gain in the savings account.
My other debt, my car loan, doesn’t fit neatly either, because it has no interest rate. It’s just a flat monthly payment. For that loan, it would be much better to continue to pay monthly, and put any extra into my savings account, rather than try and pay it down quickly.
I suppose the Snowball Plan just isn’t for me. It’s likely that by the time I start making payments on my student loans, my credit card will be paid off. I guess this is actually a good thing, although I’m a little bit disappointed that I don’t get to make use of my new knowledge.