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Fix My Finances: Help me prioritize my debts

Welcome to Fix My Finances, Yahoo Finance’s personal finance series. Each episode, we take a look at one viewer’s financial state of affairs and offer advice, insight and information on a variety of issues, including how to save more, spend less and pay off lingering debt.

In this episode we spoke with Jessica, a 23-year-old college student living in southern New Jersey with her parents and two dogs. Jessica, who works full time as a veterinary technician and does wedding photography on the side, is in her last semester at school. She would like to buy a home and move in with her boyfriend when she graduates, but her debt—from student loans and credit cards—stands in the way.

Jessica is living at home while she attends college. She doesn’t have to pay rent, but she does need to pay to board her horse.

Taking stock

Jessica has nearly $42,000 in student loan debt and close to $6,000 on her credit cards. She also has three years left on a car loan. Living at home, she doesn’t have the monthly expense of rent or a mortgage, but she is on the hook for boarding fees for her horse.

Stephanie Genkin, a certified financial planner based in New York City, says Jessica should start tackling her debt before making any big decisions about her living situation.

Prioritize your debt

Genkin says Jessica should, “start chipping away at the most expensive debt before [adding] rent and any other monthly living expenses.”

Jessica has taken out both federal and private student loans to pay for her college education. The interest rates on the private student loans tend to run pretty high. In Jessica’s case, her private loan rates are 9–11% and make up about half of her total student loan debt.

Most student loans have a six-month grace period after graduation, so she won’t be required to make payments right away. However, Genkin says with such high rates, she should start tackling that debt immediately.

Then there are those credit cards. Although she is in school full time, Jessica is working full time too, and that’s great. Unfortunately, the wedding photography business she runs on the side has led her to rack up hefty credit card debt. The interest rates on her credit cards are between 19-24.99%.

Genkin says she should start paying down that balance right away, especially while she is still living rent-free with her parents. This will boost her credit score and will make her more attractive to mortgage lenders when she eventually buys a home.

Genkin says she should also hit her car loan while she is able to live rent free.

Short-term belt-tightening can go a long way

While this may not be what Jessica wants to hear in the short-term, this strategy will pay off in the long-term, Genkin says. With a little discipline, she can get herself out of debt and start her adult life on strong financial footing.

Then next year, the road to homeownership will be much clearer.

“Making a one year ‘sacrifice’ to tackle those expensive loans,” says Genkin, “is going to help [her] get on the right path and create a stronger financial foundation to start creating the life [she wants].”

Want to be a part of this new series? We are looking for people in their 20s and 30s who need a money makeover.  Apply here.