Wealth and Prosperity: Control Debt: Debt Reduction Plan

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The trek for families with positive cash flow and positive net worth. The trek focuses on saving, accumulating assets and building net worth, protecting cash flow and assets, enjoying prosperity and giving back to others.

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This is activity 14 of 52 in the Wealth & Prosperity in Prosperity Quadrant III trek.

The activity: Have a plan to reduce and control debt.
The trek: Build wealth and use prosperity to enjoy life and give back.
The terrain: Prosperity Quadrant III (positive cash flow; positive net worth).
Difficulty rating: Moderate

Debt is a valuable financial tool that requires much of us and our circumstances. If debt gets out of control we need to take back control.

Credit Card Debt

An earlier activity in your trek involved reducing credit card debt. That activity had a goal of paying off all credit cards until all credit cards were paid in full every month. The activity called for paying off the credit card with the highest interest rate first.

So, if you are working on that activity or you pay the full amount owed for each credit card every month you are well on your way to controlling debt.

Other Debt

Now that you are in control of your credit card debt it’s time to take a look at your other debt. This can be a little complicated.

Pay down debt with highest interest rate

Simplistically, you want to continue to use the credit card reduction strategy: pay off debt with the highest interest rate first. But it gets a little more complicated than that.

Consider tax-deductibility when comparing interest rates

Because some interest is tax deductible you want to work to pay down debt with the highest after-tax interest rate.

To determine the highest after-tax interest rate simply multiply your interest rate by (1 minus your tax rate).

Let’s say you have a mortgage with a 5% interest rate. But your tax rate is 25%. Your after-tax rate is effectively only 75% of 5%, or 3.75%. If you have another 5% loan that is not tax deductible you’ll want to pay down that loan first.

Consider what you can earn from investments

If you’re lucky you’ll have a loan with a very low after-tax rate. For example, it’s possible you may have a consolidated government school loan with a 2% tax-deductible rate. When the interest rates get that low it’s time to consider making only the minimum payment. If you believe you can earn a higher rate of return investing in stocks then make the minimum payment and invest the difference.

Related Trek Side Trips

Trek Itinerary

Wealth & Prosperity in Prosperity Quadrant III

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