Prioritizing Debt Payments
What does it mean? Taking on debt is necessary to make investments in your life that would otherwise be impossible. However, when there are multiple debts in the picture, on top of all other aspects of business or family, it can be easy to lose focus of which ones to pay down first. I see this time and time again in the lives of many smart and successful clients.
Interest rates are the key here, and it is best to pay down high-interest loans/debt first. Interest can be seen as a guaranteed loss. Therefore, minimizing interest burdens is a guaranteed way to keep more money. Einstein famously said, "Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn't, pays it."
As a rule of thumb, any debt with an annual interest rate of over 5% should be paid off as soon as possible. If it's below 5%, it's possible for the money that would pay off that debt to be more valuable elsewhere, but this is very dependent on the situation. I'll walk through some typical lines of debt, starting from the highest priority:
Credit Cards: Often, have the highest-interest rate debt with annual rates typically between 15-25%. Furthermore, interest compounds daily. Ideally, you want to pay off Credit Cards in full every month and have a zero carryover balance. If you need more time to pay off the amounts accruing interest, you can transfer the balance to another card and defer interest accrual for some time. Balance transfers are merely a stopgap. Paying off the principal balance is the true solution.
Bank loans: Bank Loans for your boat or permit are likely the next in line. Highly dependent on the interest rate environment and the individual applicant, the rates could be between 5-10%. These are also priority debts to pay down but won't have the dollar-for-dollar impact of paying off credit card debts. HELOCs (Home Equity Lines of Credit) are also in this category, although they would typically have lower rates than a boat loan since the collateral is more stable.
No-Interest Loans or Family Loans: If you have family loans that are of a more nominal degree like 1-3%, these can be paid off after debts with higher interest. However, don't just stick to the math. If there is someone who has entrusted you with a low-interest loan, it may be well worth the goodwill to prioritize their repayment.
Debt itself is not a bad thing. In fact, it's a necessary step in making commitments to your fishing operation and your financial goals. Just be sure to take it on responsibly and have a plan to pay it down that aligns with your income capacity.
About Robert
Robert Seid is a financial advisor and Partner at Blue Summit Wealth Management, an independent wealth advisory firm in San Diego, CA. He also captains an Alaska commercial fishing vessel in Bristol Bay. His experience in both industries provides him the perspective to share financial guidance specifically geared for commercial fishermen. To learn more about how Robert and Blue Summit can help you and your operation succeed, please visit www.bluesummitwealth.com or email him at robert@bluesummitwealth.com.
Robert started in the Bristol Bay fishery in 2011 as a green crew member, walking the yards to find his first opportunity. His love for nature and adventure found a home in Bristol Bay and, after his first year on the water, he was hooked. He has returned every year since and purchased his own vessel in 2019. As a skipper, his dedication to commercial fishing has only continued to grow.
