When it comes to paying off debt, everyone has an opinion on the most effective way to do it. Okay, not everyone. Mostly personal finance nerds. No one else really cares. Regardless, it seems the preferred debt payoff methods fall into three basic camps: debt snowball, highest interest first, or debt tsunami. I am asking you, dear readers, for your advice on my own debt payoff. (Because apparently this week is Erin Uses Her Readers For Life Advice Week.)
If you do not know what the debt snowball is, then this must be the first personal finance blog you’ve ever read. If that is the case, please god go somewhere else. I’m in five-figure debt! I have absolutely no idea what I’m talking about!
Anyways, for a quick overview: the debt snowball is paying your debt off from smallest to largest in terms of outstanding balances. It does not take interest rate or lender type into account. The idea is that you will pay off your smallest debt quickly and that quick wins will motivate you to keep snowballing until your debt is eradicated. Psychologically, this is the way to go.
HIGHEST INTEREST FIRST
The highest interest first method suggests that you pay off your debts in order of interest rates – highest to lowest. This method is mathematically the way to go, because it will save you the most in interest. Our strictly rational and logical friends will fall into this camp. Why doesn’t everyone just do it this way? Because we don’t all make decisions based on what makes the most sense rationally. We have emotions and they dictate more of our decisions than many of us would like.
The debt tsunami, a term coined by Adam Baker of Man vs. Debt, is a debt payoff method that suggests paying off debt in order of emotional impact. The idea is that you are attacking a debt that you truly HATE having and it motivates you to pay your debt down faster. What debts might have a strong emotional impact? Well maybe you owe a family member and the outstanding debt is causing tension at family functions. Or perhaps you maxed out a credit card and jeopardized your credit score while you were going through a divorce to try to make yourself feel better. Like everything else in life, paying off debt can be a very emotional process.
WHICH IS BEST?
Where do I fall? I don’t know yet.
The first problem with choosing between these three methods is the ongoing struggle between who I am and who I want to be. I’m a highly emotional person who wants so badly to be a rational person. So while I know it makes the most sense mathematically to pay off my highest interest debt first (student loans), psychology says I should pay my lowest interest debt first (furniture). Emotionally, the debt I hate the most is Chase. We are currently focusing on Chase, but that is only because we bank with them so the payments are easier.
Which leads me to the second problem, my highest interest debt has the highest balance and my lowest interest debt has the lowest balance.
My debt in order from highest balance to lowest balance:
Student loans: ranging from 3.15% – 6.55% (most 6.55%)
Discover: 2.99% until February 2014
Chase: 0% until September 2013
Furniture: 0% until July 2014
As you can see, the debt snowball and the highest interest rate methods are completely contradictory in my case. Like completely. Also, my biggest debt, student loans, is 18.98 times the size of my smallest debt, furniture*. I’m also in the process of selling my furniture, which would suggest that I should pay that off first anyways but it is at 0% for over a year still. *bangs head on desk*
Are you confused yet? I am.
So I need your advice. The only thing I actually know is that I want to pay off the three smallest balances before the interest rates go up. Everything else is fair game.
If you were me (which would make you one very lucky bastard), what would you do? What method did you use when you were getting out of debt/what method are you using to get out of debt? If you’ve never been in debt, I hate you. Also, what do you think is the best method?
*In case you were wondering, I will be revealing my debt numbers at the end of July. There is a reason for that…**
**Oooo, intrigue! I guess you’ll have to keep reading RDS. I’m assuming you would read either way, I mean I’m pretty awesome.