Debt is scary. It’s a dark cloud looming over your financial security. And the only way out from underneath the dark cloud of debt is to pay it off. For very few people, that’s an easy fix—pay off the debt and move on. But for most, debt is more than just a car payment or a credit card bill.
Considering that the median household debt is $93,700, choosing what debt to pay off first can be a bit of a puzzle.
There are two schools of thought when it comes to paying off debt. The first one is paying off high-interest debt first. And, the second one is paying off the lowest debt first.
Let’s take a look at the pros and cons of both philosophies.
What Basics for Both Philosophies
Whether you choose to pay off your highest-interest debt or your lowest debt first, there are some basic rules.
First, you need to list out all of your debt, so you have a clear picture of what you owe. Then you need to make a budget, and you need a line that includes the minimum payment of your debts.
From there, you need to see how much money you have leftover at the end of the month—after you’ve paid all of your bills. That’s how you determine the additional cash that you will apply towards your debt.
Once you have the foundation in place for tackling your debt, you can pick a philosophy.
A lot of people like to pay off their highest interest debt first because they feel like they are throwing away money at interest.
This is a great philosophy. The trick is making sure that you are paying more than the minimum payment. If you are not, reaching the end can take a considerable amount of time.
You will spend less money in interest over the life of your debt.
If your highest interest debt is substantial, it can take a significant amount of time to pay it off. When things take a long time, it’s challenging to stay motivated. So, you can easily fall off track.
Lowest Debt First
People who like to see results fast, often lean toward this approach. Financial guru, Dave Ramsey supports the lowest debt first method because he feels it acts like a snowball.
You start your snowball by paying off your lowest debt. Then, you take the payment you were making on that debt and apply it to the next smallest debt. The process acts like a snowball—as each bigger debt approaches, you have more money to dedicate to paying it off.
You can see progress much faster, so it’s easy to stay motivated.
If your more significant debts have higher interest rates, you can likely be paying interest-only payments while you tackle the other debts.
Digging yourself out of debt is no easy task, but it is possible. It could even mean reaching out to a bankruptcy lawyer. Your best bet is to look at the two examine the pros and cons of each philosophy and pick a path.
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