Module 1 · Lesson 5

Debts, Including Interest

7 min read

Debts, Including Interest

Debt is money you owe to others. Understanding your debts—including balances, interest rates, and minimum payments—is crucial for budgeting because debt payments are fixed expenses that can't be ignored.

Why Debt Information Matters

Debt affects your budget in several ways:

  1. Minimum payments are fixed expenses - You must pay these every month
  2. Interest costs money - High-interest debt is expensive
  3. Debt payoff is a goal - You may want to pay extra to eliminate debt faster
  4. Debt affects cash flow - Large payments reduce money available for other priorities

Types of Debt to Track

Credit Card Debt

  • Outstanding balances on credit cards
  • Interest rates (often high: 15-25%+)
  • Minimum monthly payments

Student Loans

  • Federal and private student loans
  • Interest rates (varies: 3-8% typically)
  • Minimum monthly payments
  • Remaining balance

Auto Loans

  • Car loan balance
  • Interest rate
  • Monthly payment amount
  • Remaining months/balance

Personal Loans

  • Personal loan balances
  • Interest rates
  • Monthly payments

Mortgage

  • Home loan balance (if applicable)
  • Interest rate
  • Monthly payment (principal + interest)
  • Property taxes and insurance (if not escrowed)

Other Debts

  • Medical debt
  • Family loans
  • Business loans
  • Any other money you owe

Information to Gather for Each Debt

For every debt, you need:

  1. Creditor Name: Who you owe money to
  2. Account Number: Last 4 digits (for reference)
  3. Current Balance: How much you still owe
  4. Interest Rate: Annual percentage rate (APR)
  5. Minimum Payment: Required monthly payment
  6. Due Date: When payment is due each month
  7. Payment Method: How you pay (auto-pay, online, check)

How to Find This Information

Credit Cards

  • Check your most recent statement
  • Log into your online account
  • Look for: current balance, APR, minimum payment

Student Loans

  • Log into your loan servicer's website
  • Check National Student Loan Data System (NSLDS) for federal loans
  • Look for: balance, interest rate, payment amount

Auto Loans

  • Check your loan statement
  • Contact your lender
  • Look for: remaining balance, interest rate, monthly payment

Mortgage

  • Check your mortgage statement
  • Look at your amortization schedule
  • Look for: principal balance, interest rate, monthly payment

Understanding Interest Rates

Interest rates matter because they determine how much extra you pay:

  • High-interest debt (15%+): Credit cards, payday loans - prioritize paying off
  • Medium-interest debt (5-15%): Personal loans, some credit cards
  • Low-interest debt (<5%): Student loans, mortgages - may not need aggressive payoff

Rule of Thumb: Focus extra payments on highest-interest debt first (debt avalanche method).

Debt-to-Income Ratio

Calculate your debt-to-income ratio:

Debt-to-Income = (Total Monthly Debt Payments ÷ Monthly Take-Home Pay) × 100
  • < 20%: Healthy
  • 20-40%: Manageable but watch it
  • > 40%: Concerning - debt may be limiting your options

Practical Exercise

Before moving on, create a debt inventory:

  1. List every debt you have
  2. Record the balance for each
  3. Note the interest rate for each
  4. Record the minimum payment for each
  5. Calculate total monthly debt payments
    • Tip: If you've imported transactions into the app, you can use the Custom Reports feature to automatically calculate total debt payments by creating a report that filters transactions tagged with debt categories (Auto Payment, Credit Card Payment, Loan Payment, Debt Payment, etc.). You can also view debt payment totals in the Budget Spreadsheet View by opening any budget and switching to spreadsheet view.
  6. Calculate your debt-to-income ratio

Write these numbers down - you'll use them when building your budget!

Debt Payoff Strategies

When budgeting, you'll decide how much to pay toward debt:

Minimum Payments Only

  • Pay the minimum on all debts
  • Frees up money for other priorities
  • Takes longer to pay off, costs more in interest

Aggressive Payoff

  • Pay extra toward highest-interest debt first
  • Saves money on interest over time
  • Requires discipline and sacrifice

Balanced Approach

  • Pay minimums + small extra amounts
  • Makes progress without major sacrifice
  • Good middle ground

Red Flags to Watch For

  • Debt payments > 40% of take-home pay: This is a financial emergency
  • Only making minimum payments on high-interest debt: You're paying a lot in interest
  • Not knowing your debt balances: Ignorance doesn't make debt go away
  • Using credit cards to cover budget shortfalls: This creates more debt

Next Steps

Once you have your debt inventory, you'll use this information to:

  1. Budget for minimum payments - These are fixed expenses
  2. Decide on extra payments - How much can you afford to pay extra?
  3. Track progress - Watch balances decrease over time
  4. Celebrate milestones - Paying off a debt is a major achievement!

Key Takeaway: Debt is a reality for most people. Know exactly what you owe, the interest rates, and minimum payments. This information is essential for creating a realistic budget that addresses your debt while still allowing you to meet other financial goals.