First Things First : Why You Must Get Out Of Debt

May 22, 2020 · by The Escape Artist · in Debt ·

Here’s a question I saw online in a financial discussion forum: 

“I would like to ask some advice from you. I have recently came into a small windfall of money to the sum of £3K and wondered what best to do with it. Not a lot I know, but for my salary its quite a bit.

Initially my thoughts were to either: – Invest into a stockmarket tracker fund?; or – Start saving towards a deposit for a flat? …but then I wondered whether I should use it to pay off my credit card debt or my student debt?”

This is a bit like someone asking what type of garden furniture they should be buying when their roof is on fire.  Often in personal finance there is no right or wrong answer, its down to individual preferences. But here there is a correct answer and it goes something like this:

Why are you talking about investing in the stock market or buying a house?

First things first…you have CREDIT CARD DEBT and that is an EMERGENCY. You need to pay that off, right now!

This was a mild case. The windfall was enough to clear the credit card debt, problem solved. But the fact that someone was even asking the question made me realise how much financial illiteracy confusion there is out there.

I’m sure you realise that debt is a trap, but perhaps you could forward this article to someone (especially a young person) that needs to know this?

First Things First

Let’s say you’ve locked down your spending and have some money to throw at your debts / savings / investments. Where should it go?

Well, first things first…there is a hierarchy of priorities:

First you pay off payday loans and bank overdrafts (typical interest rate ~40%).

Next you pay off credit cards (typical interest rate 20-30%).

Next you build up an emergency fund of 3-6m expenses in cash in an instant access bank account.

Next, have you cleared all expensive consumer debt? (excluding a mortgage but including personal loans, hire purchase, car lease payments etc)

Now (and only now) you can invest in the stock market.

[Note: I have excluded UK student debt which is more like a graduate tax that depends on earnings and so depends on individual circumstances.]

 To continue reading, please go to the original article here:

https://theescapeartist.me/2020/05/22/back-to-basics-why-you-must-get-out-of-debt/