How to Pay off Debt - Things to Avoid

How to Pay off Debt: Things to Avoid

Let’s say you’re in a position where you want to pay off debt. You have decided that the best and highest use of your money is to get rid of a particular loan or multiple loans so that you have more cash flow that’s not required to be paid to these fixed loan payments.

The reason that we’re talking about this is that a lot of times people pay off debt in a dangerous way, and set themselves up for financial failure.  A lot of stress happens in someone’s life if they pay off debt the risky way.

Things to Avoid When You Pay off Debt

Using All Your Cash to Pay off Debt

Leaving yourself with no cash is risky because you might have no loans, but now you’re in a position where you have no money that you can access.  In that case, you’re probably going to charge something up on a credit card again because you don’t have access to capital.

Focusing on Interest Rates

The problem with looking at just the interest rate is that it blinds you from seeing the big picture. It can take off your focus from what matters, and that’s freeing up cash flow.

Sometimes they’re the worst loans to pay off that free up the smallest amount of cash flow for you and don’t get you that far ahead.

Only Paying Smallest Loans First

Sometimes this might make sense but also this is the wrong focus. It can take your mind off of the big picture. What we want to do is focus on cash flow.

How to Pay off Debt

It all comes down to cash flow, and the reason is that you want as much cash flow as possible today in your financial life so that you can save more, and have money left over to direct to savings and direct to investing in cash flowing assets.

Don’t Drain Your Emergency Fund

The first is that you don’t want to pay off any loans until you have an emergency fund. I would recommend having a six-month emergency fund before you use any extra cash to pay off loans.

This may not always be possible for each situation, so this is just a rule of thumb.

Stop Extra Payments

Every time you make an extra payment, that’s money going to a bank or financial institution that could be directed to building up your assets.

Direct all of that extra money that you might have been making extra payments with over to savings.  The reason for this is that you need to build up an emergency fund before tackling the debt.

Unfortunately, all too often, people spiral right back into debt after paying it all off because they didn’t have cash in their control.

Pay off Loans All at Once

We want to build up enough to pay off each loan all at once. That’s going to keep you in as much control as possible.

Determine Which Loan to Pay off First

Leverage the Cash Flow Index Snowball Method, for a more comprehensive strategy to pay off debt.

Rachel Marshall

Rachel Marshall

Rachel empowers her clients to maximize and control their money so that they can accomplish their dreams and live out their highest purpose. She believes that if you understand the short and long-term impacts of the financial choices you make, you’re better suited to make choices that put you in control of your resources. She helps you discover money flowing out of your control, strategize ways to have more money flowing into your control so that the end result is that you have more money to retain and utilize during your lifetime, and more to pass on to future generations.

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