How Drastically Should You Tackle $60,000 in High-Interest Debt?

“Let’s move on to Matt’s question on Instagram. He says, ‘My wife is working on tackling $60,000 of high-interest debt. She owns her car outright and it’s worth about $111,000. Is it worth it for her to sell the car and get a down lease and use that $11,000 for debt? It would likely be in my name since she would likely not be approved. So, this is some fancy strategy for paying off debt. What do you think?'”

“So, the wife, the spouse, has $60,000 of high-interest debt. I assume it’s like credit card debt, right? And she has a paid-for car that’s $11,000, that’s worth $111,000. He’s saying she could sell it and chunk that towards the debt. Yeah, okay. So, while that sounds viable, right? Like you could take the $111,000 car, you could take that $11,000, you go satisfy some portion of that debt, you’re still going to have what? $49,000 of debt that’s going to require some sort of debt service. It’s going to require cash outflow. Well, when you have that much debt, the real problem that you have is a cash flow problem. You need to figure out how I can get more cash flow to throw at this thing. I’ve got to get it knocked out. The problem is, with taking the $111,000 car and now going and replacing it with a lease, now I have something else pulling on my cash flow. So, I traded something that did not require any of my cash flow, yeah, I decreased my debt low, but it’s not like I knocked it out. It’s not like the $11,000 is going to knock out debt so that you now have cash flow that’s freed up that can be deployed elsewhere. You haven’t really, in my opinion, based on the limited information I have—this is not specific advice—it does not seem to me that that would create the help that you would like for it to create in terms of satisfying that debt.”

“Because now what you are doing is you are creating another draw on your resources. In my opinion, when it comes to debt pay down, you want to figure out how do I get all of my cash outflows as small as possible so that I have as much money as possible to tackle that step three, high-interest debt, as I can. So, here’s an analogy that I was sitting there thinking that just while Bo was talking, can we—I was—you’re on a boat. Boat’s taking on water, that’s the debt. The $60,000 of high-interest debt. And you’re like, ‘I’ve got a chewing gum here. My wife and I are both chewing on chewing gum. We could stick that in the hole by selling this car.’ And it would slow down the water, but I know that eventually that water is going to pop through the chewing gum, and we really haven’t fixed the problem. We just delayed the water coming in for a month or two. Because really, taking a paid-for asset and then doing a lease, that you’re just front-ending the money.”

“But here’s the thing, I bet your wife needs a car. And I start thinking about what are cars trading. I mean, it’s not like a $111,000 car is a luxury car. I mean, that sounds like it’s probably just a get-you-to-work type of car. So, now, if this was you tell me, ‘My wife’s driving a BMW. Should we get rid of it?’ Heck, yeah, you know, because that’s not a piece of chewing gum. That’s actually probably a full patch kit. You know, that’s like you got a patch kit, and let’s see if we can fix the hole. Because it might even be enough to just fill the hole completely. So, you’re not taking on water. I would rather you focus on fixing the hole in your boat, your financial boat, by actually changing the system and the way you’re doing money. You have to find better ways to either make more money, so maybe you’re driving the car to earn some money, or you have to cut your expenses and lose mercy. I mean, because you have to. I’m sad, but when you have this—I was doing some prep for something.

I thought credit cards were at 20%. B credit cards, in a lot of times these days, are at 30%, certainly for high-risk borrowers. Wowzer. I mean, if that’s the type of thing, then you need to. I mean, you don’t get to go out to eat. You don’t get to do the fun stuff anymore. And that’s where I think nobody wants to hear that part. Because what I’m trying to do is install essentially a sump pump or something that every month is running and draining more water out. So, one day you wake up and you’re like, ‘Hey, there’s no hole in the bottom of my ship anymore.’ You know, because that’s what you have to create. Something that’s not a temporary fix. It’s actually something that fixes the systemic problem that’s going on that created this. Now, if it’s student loans or something else like that, it’s still the same answer, in the fact that you’ve got to either figure out how you’re going to make more money or how you can cut expenses without mercy to actually get this paid off. But just selling a paid-for $111,000 car might feel good until the second week she’s sitting at the bus stop, and it’s raining, and you’re the bad spouse for selling the ride. Maybe we shouldn’t have, because that feels good in the temporary, but it doesn’t actually fix the problem. And that’s the problem I have with it.”

So, Matt, y’all, I mean, I’d like to tell you to go out to eat and talk about this. Nope, buy your crescent rolls, wrap some hot dogs in the crescent rolls, put a little cheese on top, and then you’ll have a discussion on this, and, like pigs in a blanket, is what I mean. That’s what I used to eat as a kid. I love that stuff. For more information, check out our free resources.