If your investments are the wind that pushes your boat forward, then high-interest debt is the anchor dragging behind your boat. The Fiscal Compass believes that you cannot reach financial independence when you're still making payments on the things you bought yesterday.
1. The Debt Dilemma: Good vs. Bad Debt
There are two kinds of debt: there can be an advantage associated with "good" debt (like a low-interest mortgage) that will help build your equity but "bad" debt will cost you to have and diminish in value over a period of time (i.e., credit card balances at 20% interest). Credit card balances at that high of an interest rate are the worst kind of debt to have, and are the kind of debt that will keep you from reaching your FIRE destination.
2. Snowball or Avalanche?
There are two proven methods to become debt-free, and the "best" will be the one you actually use regularly:
The Debt Snowball: Pay your smallest amount due first. Closing a debt gives you the initial positive feedback on which to build momentum.
The Debt Avalanche: Pay the interest rate of the highest amount due first. While not as rewarding or providing a temporary feeling of accomplishment, it will ultimately save you the most money over an longer time frame.
3. Avoiding Lifestyle Creep
As your career develops and your salary grows, your expenses develop at the same rate as your salary. Thus, if you spend all of your pay raises on a larger car, your "FIRE" will stay exactly where it was before the raise.
