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 Owner of a ratting catting machine
Posts: 2258
  
| If you're game!
I have been reading a lot about getting ahead, investments, debt, etc. I'm pretty sure the one thing they don't teach in school is how to actually survive in the real world. It's been a bumpy ride, but my husband and I are doing all right and keeping pace.
I do have a question that sticks out to me, however!
I see a lot of conflicting information out there about paying debt. Some claim to pay off the largest balance with the largest interest rate first. Others claim to start with the smallest and work your way up, paying no attention to interest rate.
What do you think is the smartest and the quickest way to pay debts? Would love some input, I'm pretty sold on both ideas, lol, it makes it hard to clarify the goal... |
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Expert
Posts: 1343
Location: East Texas | We have always believed, whatever the balance is, it is best to pay whatever debt has the biggest interest rate. That interest will eat you up! |
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 Accident Prone
Posts: 22277
Location: 100 miles from Nowhere, AR | My husband had a lot of debt when we married. We started with largest interest rate, regardless of amount. His school loans were the last thing we paid off. It took about 2 years and then we were able to start saving for land and house. Our personal debt right now is the house and horse trailer. |
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Veteran
Posts: 269
| I think part of the reasoning behind paying off the the smallest balance first is to get your momentum going. There is sense of relief when you pay a loan off. PLUS, you are supposed to take that paid off loan's payment and apply it every month to the next loan you plan to pay off and so on (snowballing).
For me: I do the math. I run all scenarios and see which one saves me the most. There are several calculators out there, but here is the one I use:
http://www.efunda.com/formulae/finance/loan_calculator.cfm
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Miracle in the Making
Posts: 4013
| I agree pay the most of that has highest interest alway alway make sure the extr is applied to balance of principle
on your home loans always pay extra on principle its amazing how fast it helps
know the difference from simple interest and compound
credit cards and home are compound cars and trailers usually simple interest |
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 Extreme Veteran
Posts: 475
Location: Alabama | Dave Ramsey says to pay off smallest to largest. His theory is that the quick wins of paying off the small debts drive your motivation & you will "find" money to pay off the larger amounts quicker. He says that if it was about the math, you wouldn't be here. However you get there, being debt free is a great relief! |
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 Expert
Posts: 2097
Location: Deep South | I've been reading a lot about this too. I tend to agree with Dave Ramsey.
Yes. It makes more logical sense to pay off the one with highest interest rate first.
But obviously not everyone thinks logically when it comes to money or they wouldn't accumulate massive amounts of debt. So I think the start with the smallest debt first approach works really well in "tackling the mountain" so to speak.
Like others said, it builds your momentum, gets you excited about paying off debt, gives you a feeling of accomplishment, and allows you to apply that payment to the next smallest debt once the smallest is paid off. |
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 Expert
Posts: 1432
Location: Never in one place long | Our philosophy is to pay off the little debts first that way you have LESS pmt, it's worked for us and we've now paid over $50,000 off in less then 4 yrs! It encouraging also and motivates you when you have one less loan to pay! That being said, we also try to pay the higher interest loans first if we can but if it's a HUGE loan and not easy to pay off, maybe pay the smaller ones first.
Paying off debt is SuCH a smart thing, we're trying to get completely out of debt but making home improvements and paying cash for that makes it tough, just put a big chunk towards paying off debt right from the start and keep the rest. |
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 Warrior Mom
Posts: 4400
| We are snowballing now. Smallest to largest. Im gonna tell you I paid off a smaller loan today and it feels great! Now im applying that payment to the next debt along with the regular payment. That one will be paid off in about 2 months. Maybe sooner. Then onto the next. Keeps me motivated for sure! |
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Veteran
Posts: 203
Location: kansas | I think it depends on the person, some people need fast rewards to keep going, and others see the long term benefits and that is what pushes them to continue.
For me personally I look at interest rates, because I am a money saver. When we were financing our house I watched interest rates daily to try to get the best interest rate lock that we could. Also though from working at a bank I see people who could do 15 year loans on their houses and they choose to do 30 year, I understand you don't want to be strapped trying to make your house payment, but I also see what they are making and they don't understand how much money they would save if they did a 15 year instead! Some days I just have to shake my head! Lol
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 Expert
Posts: 2457
| afkatrina - 2014-08-20 12:28 PM
Dave Ramsey says to pay off smallest to largest. His theory is that the quick wins of paying off the small debts drive your motivation & you will "find" money to pay off the larger amounts quicker. He says that if it was about the math, you wouldn't be here. However you get there, being debt free is a great relief!
YES!!!!! My fiance and I have been following Dave Ramsey for quite a while. We took his Financial Peace seminar through our church in January. It has completely changed our lives for the better. He is debt free and I will be in October.
If you give yourself the momentum with the small debt, you then roll that payment into your next debt to be paid off. IT WORKS. You have to commit to it, but it does work!!  |
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 You get what you give
Posts: 13030
Location: Texas | I am going to graduate with probably 150-170,000 in student loan debt with vet school and my undergrad.
I am going to try and pay off my private loans first because there's no forgiveness programs for them.
The federal loans I will pay off as I can, but hopefully I will qualify for some of the loan forgiveness programs so that will help. |
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 Go Your Own Way
Posts: 4947
Location: SE KS | vjls - 2014-08-20 12:26 PM I agree pay the most of that has highest interest alway alway make sure the extr is applied to balance of principle
on your home loans always pay extra on principle its amazing how fast it helps
know the difference from simple interest and compound
credit cards and home are compound cars and trailers usually simple interest Don't think your home loans are compound interest. They are simple.
Edited by Dinero10 2014-08-20 4:18 PM
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 Not Afraid to Work
Posts: 4717
| Very interesting. ive wondered this also. I have about 50k in student loan debt and some minor debt on CC plus a car.
Is it better to pay a little bigger payments every month or bank that little extra and throw a bigger chunk at it? Anyone know? |
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 There Could Be Aliens Out There
Posts: 1393
Location: North Central Kansas | Sit down with Excel and figure out which method will save you the most. |
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Miracle in the Making
Posts: 4013
| Dinero10 - 2014-08-20 5:18 PM vjls - 2014-08-20 12:26 PM I agree pay the most of that has highest interest alway alway make sure the extr is applied to balance of principle
on your home loans always pay extra on principle its amazing how fast it helps
know the difference from simple interest and compound
credit cards and home are compound cars and trailers usually simple interest Don't think your home loans are compound interest. They are simple.
you are total wrong home loans are compound go to bankrate.com do a mortage amoraztion.
look at your statement each month see that interest that compound just like a credt card |
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Miracle in the Making
Posts: 4013
| stayceem - 2014-08-20 6:24 PM Very interesting. ive wondered this also. I have about 50k in student loan debt and some minor debt on CC plus a car. Is it better to pay a little bigger payments every month or bank that little extra and throw a bigger chunk at it? Anyone know?
again what is the interest is it simple or compound that is what ypu look for simple is fixed compond is everday interst accures
got to bankrate.com there are seveal diferent type of calutlators get rid of credit card debt |
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 I'm Here!!
Posts: 4583
Location: Is it Summer Yet? | Call all the companies and see if any of them will drop the interest rate.
After that I started with the smallest loan amount and threw all my extra money at that, while maintaining payments on the rest. Then after you have the smallest loan paid off, that take the payment that you putting on that small loan and add it to the next smallest. And just keep going from there. |
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 Elite Veteran
Posts: 1118
Location: The South | My husband and I are doing the Dave Ramsey method for our student loans. At first it seemed weird to not pay attention to interest rates, but after the first loan was paid off it made sense. It's so exciting! We hope to have them all paid off in 4 more years. We were in school for 16 years total so we had a crap load of debt. Now I'm kind of obsessed with the debt snowball.
I just bought one of his books and took the bull by the horns, it's not that intimidating when you break it all down. You can do it!
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Expert
Posts: 2457
| LindsayJordan84 - 2014-08-20 11:05 PM
My husband and I are doing the Dave Ramsey method for our student loans. At first it seemed weird to not pay attention to interest rates, but after the first loan was paid off it made sense. It's so exciting! We hope to have them all paid off in 4 more years. We were in school for 16 years total so we had a crap load of debt. Now I'm kind of obsessed with the debt snowball.
I just bought one of his books and took the bull by the horns, it's not that intimidating when you break it all down. You can do it!
FANTASTIC!!!! That program has changed my life, my best friends' life, and some family members as well. Once you see that first debt go away, it is like walking on water and is AWESOME!!!!
I am a Dave Ramsey follower forever!!! |
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 Extreme Veteran
Posts: 357
Location: Florida | If you are looking at overall total savings and getting it paid off the quickest, then go with paying off the higher interest rates first. But another factor to consider is whether or not the interest in deductible on your tax return. Home mortgage and student loan interest are both deductible expenses, so you would want to factor that in the consideration as well.
If you need the feeling of satisfaction in reducing the # of different debt payments each month, then starting with the smallest is better.
But going with the interest rate you can also create a spreadsheet of total debt each month and see the continual decrease and that might provide the satisfaction needed to see the difference you are making in reducing your debt.
Someone mentioned earlier the issue of simple vs. compound interest, but if you are making monthly payments that is a moot point. Compound interest is only a factor if you are not making payments and the interest is accumulating. When you make payments the first portion of the payment is applied to the interest accumulated from the date of last payment to the date of current payment and then the remaining amount applies to principal. So if you are paying the current month's interest and some of the principal, then each month's interest is calculated on the remaining principal balance and therefore is simple interest. |
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 I Prefer to Live in Fantasy Land
Posts: 64864
Location: In the Hills of Texas | We've been debt free for over 18 years and we really don't know how people make it in today's world if they have a lot of credit debt and a mortgage.
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A discussion about debt.