Everyone has an opinion as to how to pay down debts. Mine is to first list all of my creditors with their name, total amount owed and interest rate. Then, to continue to pay the minimums on all debts owed while I decide on which one to focus on destroying.
Motivation vs. Math
The Debt Snowball method is the idea of starting with the smallest debt and then moving on to the next-smallest. This is to give someone motivation as they have early wins that encourage them to move forward. This idea is expressed by Dave Ramsey fans and other money experts like Pete “the Planner” Dunn.
The Debt Avalanche method is to focus on the debt with the highest interest rate. The idea being that this will cost less in interest costs and the math says that I’ll get out of debt sooner.
This debate reminds me of the one over which is the best exercise to lose weight – cardio or weight training. The answer is, whichever one you’re willing to do. If there are a couple of really small debts that can be wiped out in a few months to give an early boost to the debt elimination goal, go for it. But if you feel that you have the discipline to focus on the prize at the very end that comes with using math to pay the least interest costs, choose that route.
Other things to consider…
Also we need to consider the type of debt. If it’s a “dangerous” debt such as one owed to the IRS or a payday loan, that warrants special consideration. Also debts owed to service providers that we want to continue a relationship with, such as doctors or dentists. Is it a debt owed to a family member? Is the interest rate variable at a time when rates are rising? Is there a chance to refinance the loan? Applying for a lower fixed interest personal loan or zero interest credit card may be a part of the solution.
Is the debt attached to something that can be sold? For example, selling the car that has the auto loan. Can anything else be sold to get funds to put towards the debt? Is the student loan private or federal? Subsidized or unsubsidized? Federal student loans have more protections than private ones, so it may make sense to target the private loans first.
My goal
My goal for the next year is to pay off one credit card whose zero percent interest rate expires in June. Then to focus on paying off at least one student loan each year. I tried to keep up with the interest costs on my unsubsidized loans while in school, so that after graduation the total remaining is similar to the amount that I actually borrowed. I plan to pay the minimums on five of my six loans on the standard 10 year repayment plan, while targeting one loan at a time to kill off. The goal is to be student loan debt free in six years or less.
