As you prepare for retirement, cutting your debt is an important area of focus. One common debt payoff rule of thumb is to pay the debt with the highest interest rate first and then move on to the next highest. Based on this strategy, a good order of priority for paying off debt would be:
1. Credit card debt
2. Student loans
3. Automobile debt
4. Personal loans
5. Home equity lines of credit
Snowball Debt Repayment Plan
An alternative debt repayment option is the snowball plan. Following this strategy, you continue making all minimum monthly payments, but rather than organizing debts by their interest rates, you focus your extra money on eliminating the smallest balance first. Once you've paid that one off, take the money you were paying each month toward that balance and apply it toward the next-smallest balance, along with the minimum payments you were already making on that account.
When the second debt is paid off, you once again take all of the money you were paying each month and put it toward the next-smallest debt, continuing onward through all of the debts you owe, building momentum like a snowball rolling downhill.
To help you prioritize, click here for a debt reduction worksheet from the US Department of Labor.
This article is for informational purposes only. For advice about debt repayment and financial planning, please contact a financial advisor. IMRF contact center representatives are not trained financial advisors.
