A common misconception is that debt is bad. The world that we all know functions on debt. The problem is that sometimes, we get locked into too much debt. In these situations, the common question to ask is how to pay off debt.
Good vs Bad Debt
The first step in learning how to pay off debt is to understand what is considered good or bad debt. Knowing what constitutes bad debt will point you in the right direction on how to go about things.
First of all, a mortgage is considered good debt. This is the last debt you should think about paying off. This is because interest rates for mortgages are lower than for a personal loan or credit card. Also, very few people can afford to buy a house with cash, thus mortgage debt is considered necessary.
Unnecessary or bad debt is debt that you accumulate for things that are not essential for living. This includes debt from credit cards, personal loans, and car debt.
How To Defeat Bad Debt
To pay off debt, you need to start with a list of all your debt, how much you have left of the principal to cover, and the monthly installments. You need to focus on your smallest debt and create what many refer to as a debt snowball.
A debt snowball refers to the process of paying off the smallest debt first and then using that feed-up monthly cash to pay off the next debt. This is the most efficient way how to pay off the debt in a logical manner. Certainly, you want to pay off your debt fast and you cannot do it by just paying the minimum monthly payments. You need to free up cash from elsewhere to pay it off early. To achieve this, you also need to work on your expenses or increase your income.