Paying Down Debt Before Starting a Family | Ally (2024)

FAQs

Paying Down Debt Before Starting a Family | Ally? ›

If you have multiple sources of debt, aim to pay off just one before you have children. It could be your biggest debt or the one with the highest interest rate. Or try to pay down the balance to a target amount. If you have multiple sources of debt, consider paying off just one before you have children.

Prioritizing debt by interest rate.

This repayment strategy, sometimes called the avalanche method, prioritizes your debts from the highest interest rate to the lowest. First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on.

Debt-to-Income Ratio

It is expressed as a percentage. You should shoot for 35% or less (more on this shortly). Recurring monthly debt is bills you must pay every month, like mortgage or rent, car payment, credit cards, student loan and monthly debt bill.

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

May not save maximum interest: The debt snowball method is not necessarily the best choice for saving money on interest. Because you're prioritizing balances over interest rates and only making minimum payments on debts that are low on the list, you could end up paying considerably more in interest over time.

High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.

What is the 50 30 20 rule? ›

The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.

U.S. consumers carry $6,501 in credit card debt on average, according to Experian data, but if your balance is much higher—say, $20,000 or beyond—you may feel hopeless. Paying off a high credit card balance can be a daunting task, but it is possible.

$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.

Key takeaways

A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Each household should spend no more than 36% of their income on debt overall.

But ideally you should never spend more than 10% of your take-home pay towards credit card debt. So, for example, if you take home $2,500 a month, you should never pay more than $250 a month towards your credit card bills.

Delinquent accounts.

If you have any debt that's highly overdue, it's best to start with that account. Delinquent accounts can have a substantial impact on your credit, just like accounts in collections, so those should be your first priority when paying off debt.

Pay more than the minimum. Expand

Pay off your debt and save on interest by paying more than the minimum every month. The key is to make extra payments consistently so you can pay off your loan more quickly.

Which Bills Should Be Paid First? Generally, the bills you should pay first are the ones that cover necessities — the main resources that keep you and your family safe and healthy. These necessities include shelter, water, heat and food. Once necessities are paid for, focus on expenses related to your vehicle.