Reduce Debt

You take on debt to acquire or buy things you can't immediately afford. Some of the most common ones are:

Home mortgages are almost unavoidable for most people that want to buy a house because the cost of a home is often several years' worth of pre-tax income. Very few of us have that kind of cash sitting in the bank. There is some preferential tax treatment in that you can write off the mortgage interest you pay (up to a limit) when filing your taxes. Recent tax law changes have made this deduction also more complicated. Since land is limited, it's reasonable to expect that your home value will increase over the long term so this isn't the worst sort of debt to have. Since this will likely be the single largest amount you owe (by far) even a small change in interest rates can save you hundreds of dollars per month - and thousands in the long run. Keep an eye out for falling interest rates and lower this as much as you can. Your best option here is to re-finance your home morgage. Read this guide first.

Most people (in the US atleast) need a car to get to and from work and to drive kids around, so a car is effectively a non-discretionary purchase. Having said that, a car, unlike a home, starts to depreciate the day you drive it off the dealer's lot. Avoid buying a higher-end car than necessary and save hundreds of dollars in monthly payments. In any case, try to pay off your car loan as soon as possible. Most auto lenders will be fine if you offer to pay off your balance in a lump sump - it just takes a single phone call to get the payoff amount. If you get an annual bonus or an unexpected tax return, then paying off the auto loan balance is a great way to use that money.

College loans often run into tens of thousands of dollars - potentially hundreds of thousands if you go to an expensive school! Very little of the interest payment is tax deductible. As hard as this is, your best option is to try and pay this off as soon as you can. Here are 5 ways to pay off your student loans faster.

For many people, spending beyond their means is the biggest driver of credit card debt. As of late 2023, the average APR for credit card debt is over 21%! In comparison, mortgage loan rates are about a third or fourth of that. If you put your money in a bank you'd be lucky to get a fifth of that as APR that they will pay you! In other words there are few things with as high an interest rate as credit card debt. So you have to find a way to reduce spending - you don't have a choice here if you want to build wealth.

One last thing before starting to invest. Get ready for a rainy day by preparing for emergencies.