I was doing some thinking about how managing your debt puts you ahead financially. We often talk about the smarter ways to invest money and different strategies therein. Managing your debt side payments can often be a bigger upside than your investments in terms of total benefit. This is because what you might be paying in interest is greater than your investment savings on the same value.
In this example, lets examine the case where you are given $5000 through a windfall. How do you use it effectively to give you the most benefit?
You have the following options in front of you.
1) Pay into your credit card that sits at 19.2% and you owe $5000 on it. Your minimum payment is $100 per month.
2) Pay into your medical debt of which you owe $9000.
3) Add to your taxable investment account of which is heavily invested in “tax exempt” funds with a nice MUNI CEF at 5%.
1) Over the lifetime of your credit card, to pay back the 5k you owe on it with minimum payments, you would be forking over a cool $20,313. So, for that 5k debt making the minimums, it ended up costing you $15,313.
2) A lot of folks end up with medical debt that has no interest accrued on the account. If it does have interest, it is often very low. So with this debt, we could say that you would ultimately pay between 9 and 15k. Max cost here for the debt side is around 6k, but it might also be nothing and varies by local laws. Some states have a maximum rate that can be charged for medical debt.
3) Assuming the 5% payout rate for the MUNI CEF, it would take you 29 years assuming a flat rate with a drip to get you to that 20k mark ($20,580.68).
For my money, I would go off with paying the credit card debt as it has the highest benefit and allows you to get cash positive quicker in the overall picture. I am personally on a track where I double my credit card payment to push it down as fast as I can. The high cost of taking loans and credit cards is a lesson we could all use and one that I am painfully too aware.