I want to start this blog post by sharing huge news: I just finished my month-end calculations, and I’ve paid off over $30,000 in debt principal in exactly 2 years!! Of course I just wish my debt would *poof* and be gone (come on lottery win!), however it’s fascinating to see the slow debt slog actually paying off. Let’s be honest- there were many months where I did not feel like I was getting anywhere. I’ve asked myself “which debt should you pay off first?” many times over the past years, and my answer now is different than most of the “guru’s” (pretend to be surprised that I’m not going along with “normal” advice…)
Which debt should you pay off first?
Most advice wants you to compare apples to apples, oranges to oranges. There are two commonly touted debt repayment methods: The debt snowball, and the debt avalanche. While they sound similar, they’re quite different.
Let’s say you have a total of $10,000 in debt:
You owe $1000 to your brother at 0% interest, $750 on a line of credit at 4%, and $8250 on a bank loan at $8% interest.
With both debt repayment methods, you are supposed to make your minimum monthly payments on all debts, then put the remainder of what you have available on one particular debt. So let’s say your debt minimums look like:
(stick with me here; I swear it won’t be all math & numbers)
- $0 minimum to your brother (he’s a patient fella)
- $50 minimum to your line of credit
- $60 minimum on your bank loan
You have determined that within your budget, you can afford a total of $500 combined debt payments monthly.
Debt Avalanche Method:
You are supposed to make the minimum payments on all your debts, and then put the remainder on the debt with the highest interest rate. So in that case: your bro would get $0, your line of credit gets $50 (the minimum only since it has a lower interest rate), and your bank loan gets the remaining $450. Total debt payment= $500.
Debt Snowball Method:
You are again supposed to make the minimum payments on all your debts, but this time put the remainder on your smallest debt. So in that case: your bro would get $0, your line of credit gets $440 (since it is your smallest debt), and your bank loan gets $60 (the min payment). Total debt payment= $500.
Math would argue that since you are paying off your highest interest debt first, the Debt Avalanche Method wins. Technically, the less you pay in interest costs the faster you get out of debt.
However, many people argue that since the Debt Snowball gives you immediate victories by tackling the small ones first (whoa, I paid off a deb that quickly!) it is the method you will actually stick to.
So, which method do I suggest?
Neither!! Sorry, I warned you that I was going to go against standard advice.
I mentioned not comparing apples to oranges earlier, but what if we do that?
I work as a dietitian. Let’s say someone came to me and wanted to set a goal of eating more fruit (humor me here). Technically, both apples and oranges count as a serving of fruit. On paper, there is no difference: eating either of them helps to achieve their goal (they’re eating more fruit). There should be no difference in which one I would recommend.
However, what if the client doesn’t like oranges? Or, what if oranges are okay, but they REALLY like apples?
I wouldn’t be setting them up for success by suggesting oranges!!
Okay… but we’re talking about debt, not about eating more fruit….
True, but it all ties into one massive thing: human nature.
Let’s say Christmas is in two months, and your whole family will be getting together. As patient as your brother is about the money he lent you, you still feel awkward being around him when you owe him money. Paying him off would really clear the air, and make you excited for Christmas. You really, really want to do that.
From a numbers perspective, you cannot pay your brother off in time. Remember, you have $500 a month for debt payments. Your line of credit demands $50, and your bank loan demands $60. At best, that means you have $390 a month for your brother. At that rate, in 2 months (ie by Christmas) you will be able to pay him $780 but you’ll still have $220 owing (of the original $1000).
Dang- well paying him off was a nice thought but guess it’s impossible, right?
No. Obviously not.
To pay him off, you need to find an extra $110 a month x 2 months. Maybe you work an extra shift. Perhaps you cut back on groceries. Maybe you sell something you’re no longer using. $110 is definitely an additional amount of money that you can come up with for 2 months.
Beyond a certain amount of money required for necessities such as food and a roof over your head, finances and spending usually come down to choices.
You might argue that if you could put an extra $110 on debt, you should be doing that all along.
Perhaps that’s true, but it again ignores human nature.
Are you telling me that every financial choice you make is perfect and fits into what you “should” do? Or that there has never been something you’ve wanted so badly that you’ve found a way to get it even though the numbers did not work at all?
Humans have a dramatic ability to overcome when it’s something they either 1) WANT really badly or 2) want to AVOID really badly [such as an awkward Christmas with your brother]
Everything in the middle is essentially habits, patterns, and coasting (and with good reason; can you imagine how exhausting it would be to pursue everything with obsessive intensity?)
So, which debt should you pay off first?
Which debt keeps you up at night? Makes you feel the most uncomfortable?
If your debts were made public, which one are you most embarrassed by?
Which debt would you most celebrate getting out of your life?
Finances might be a numbers game, but it’s driven by human nature.
The debt that popped into your mind reading this? Pay that one first.
You’ll be most motivated to do so, and will likely achieve it faster.
My advice: focus on the apple, and ignore the orange for now. Either way, you’re eating more fruit.
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