Debt Free versus Leveraging Debt
Debt-free is pretty self-explanatory. Your focus is to not take on any new debt while paying down the debt you have as quickly as possible.
Leveraging your debt means you are making your money work for you. Using the simple debt-repayment scoring system, you focus on paying down the debt that is costing you the most (anything with a score under 50). Scores between 50 and 100 require some decisions, and scores over 100 mean you are probably better off investing excess funds elsewhere instead of paying this debt off. Please note that loans with set payment amounts will see the score decrease as the balance decreases, so as you get closer to the payoff date it may make sense to just pay it off.
How do you make your money work for you?
There are many options. Popular ones are investing in real estate, rental real estate (personal or commercial), and stocks. But, really, anything with a rate of return higher that what you would otherwise be spending the money on is fair game. For example, if you are paying 3% on a loan and have the opportunity to either pay off the 3% loan or invest in something with an 8% rate of return, you would net a 5% profit by investing instead of paying off. Make sense?
You could also use a rewards credit card. This only works if you pay the balance in full each month before the statement end date. As soon as you start paying interest your “reward” becomes very costly! Use the card to pay everyday expenses- groceries, gas, utilities, etc- and earn points or cash back.
If you have ongoing credit card balances, you could consider opening a new card with a 0% introductory period. But, beware: the interest accrues in the background. If you do not pay off the balance by the end of the introductory period you will be charged all the interest that has accrued during that time frame. Second warning: do not use the original card to make new purchases or you will end up with double the debt. This method only works if you have the mindset that you will not use the first card for any reason and if you can reasonably pay off the balance transferred before the introductory period ends (divide the transferred balance by the number of the months in the introductory period to determine the monthly payment).
Some people use this method repeatedly- moving balances to a new card just before the introductory period ends so no interest is charged- but, if no cards are offering this deal or if you cannot qualify for a new card, you could find yourself in trouble.
What is your favorite option?