Debt Management

The first step in debt management is to compile a list of all borrowings with their balances, interest rates, monthly payments, and repayment deadlines. Interest rates vary dramatically by type of borrowing: mortgages (0.5-1.5%), student loans (0-0.9%), card loans (3-18%), and revolving payments (15-18%). This interest rate differential is the primary criterion for determining repayment priority.

There are two repayment strategies: the "Debt Snowball" and the "Debt Avalanche." The Snowball method prioritizes paying off the smallest balance first, building psychological momentum through the sense of achievement. The Avalanche method prioritizes the highest-interest debt first, minimizing total interest paid. Mathematically, the Avalanche method is the most efficient, but the Snowball method can be more effective for maintaining motivation.

If you carry high-interest debt, repayment should take priority over investing. Paying 15% interest on revolving payments while trying to grow wealth through investments earning 5% annually is effectively generating a net 10% loss. The rational sequence is to first pay off revolving payments and card loans, then begin investing.

For mortgage prepayment, the decision should be based on the balance between the interest rate and the mortgage tax deduction. During the deduction period, there are cases where the deduction amount exceeds the loan interest, making it more advantageous to continue receiving the deduction rather than prepaying. Additionally, debt consolidation loans (combining multiple debts into one) can be effective when they lower the interest rate, but they can also extend the repayment period and increase total payments, so you should always compare scenarios through simulation.