Money Talks, So Should You

Q&A: How should I prioritize debt?

Garry Good
by Garry Good, The Garrett Network

Good question. 

Not all debt is created equal.

When evaluating your situation, consider two simple rules:

1. The product (or service) being purchased with credit needs to outlast the debt.
2. The outstanding loan balance should never exceed the value of whatever is being financed.

READ: How do I determine which debts to pay off first?

Let's try these rules on some typical examples.

Generally, a home purchase meets these benchmarks. We expect the home to maintain its value, and even appreciate over the life of the loan.

A car loan is a bit trickier. Keep in mind, a car starts to depreciate the minute you drive off the showroom floor. So, make a down payment and avoid those lengthy 48 to 60 month loans.

College funding is a legitimate use of credit. Education is an investment in your future. Just be careful not to over-estimate the return on your investment. A degree has a limited shelf life - without lifelong learning you will soon become obsolete. If your outstanding balance is not dropping fast enough you may find yourself "underwater" on a student loan.

This brings us to another type of credit, which is almost never a good idea. We use credit cards to buy goods and services every day. Many of these purchases are consumed at the time of sale or shortly thereafter. When that monthly statement arrives, apply the above rules. Very simply, if you've already used it, or couldn't sell it for full price, then it should be PAID in FULL.


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Garry Good, CFP® is founder of Good Financial Advisors, a fee-only financial planning firm located in Bloomington-Normal, IL. He specializes in retirement planning, Garry helps clients navigate the complex transition from asset accumulation to reliable retirement income stream.