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Is it Better to Pay Off Small Debts First?

January 27, 2019 2 Comments

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There’s no worse feeling than being bogged down by debt with no plan of how to escape from the financial nightmare. Getting into debt is so easy, yet climbing back out is no easy feat. But, by taking the time to look at your debt in a big picture view and having a plan of attack, you can slowly but surely pay off your debt.

Is it Better to Pay Off Small Debts First?

But which debt repayment plan is the best option to use? While there’s no wrong or right way to pay down your debt, there are some methods that may be more advantageous than others.

If you want to learn how to get out of debt, here’s what you need to know about paying off small debts first, also known as the snowball method.

How the Snowball Method Works

A very common method of reducing your loan debt is to use the snowball method, which requires you to pay off your smallest debt first, and then as that debt is paid off, you snowball payments onto the next smallest debt balance.

Before you can use the snowball method, you must first have a clear picture of how much money you owe.

Make a list of all of your debts, including student loans, credit cards, and personal loans. You’ll also want to notate the total balance due on each debt. If you use personal finance tools like mint or PersonalCapital, then link all your credit account to get more accurate and up to date numbers on your total debt.

Let’s assume you have the following debt totals:

  • Credit card with a $1,500 balance
  • Personal loan with a $500 balance
  • Car loan with an $8,000 balance
  • A mortgage with a $120,000 balance

Using the snowball method, the first debt you’d pay off is the $500 personal loan. You will pay more than the minimum on the loan while paying the minimum balance on other debts.

Assuming you pay $200 a month, the debt will be paid off in 2.5 months. Once paid off, you’ll roll the $200 payment onto the next lowest debt, which is the $1,500 credit card.

In order for the snowball method to really work, you must stick with the plan, but you must also be willing to put a lot of money towards your debt. Paying off the smallest debt aggressively allows you to quickly reduce your debt load.

To pay off debt quickly, you’ll likely need to adjust your spending habits and focus on ways to spend less money.

You may also want to consider options for increasing your monthly income by working a part-time job, selling unwanted household items, or picking up a side hustle.

The Benefits

Chances are you’ve tried to pay off a debt in the past, but after seeing very little progress, you gave up shortly after. The biggest benefit of paying off small debts first is that it builds momentum.

There’s no better feeling than paying off a loan that you’ve dealt with for years. By paying off debt and enjoying the feeling of being closer to a debt-free life, it’s much easier to stay on track.

Another benefit of the snowball method is that it’s easy to use. All you have to do upfront is to list and prioritize your debt based on the total balance. This requires very little work and is quite easy to stick with over the long run.

The Negatives

One of the biggest pitfalls of the snowball method is the amount of money you will end up putting towards interest.

While you will be quickly paying off debt, much of your payments going towards larger debt balances will go towards interest versus the principal balance.

So while you’re paying off debt faster, you may end up spending more money in the long run.

The other method of debt repayment involves paying off debt based on the highest interest rate. By paying off high-interest debt, less of your money will go towards interest because you’ll be paying much more than the minimum balance due.

Choose the Right Repayment Method

When deciding on which debt repayment method is best for you, it’s beneficial to look at your debt balances as well as the interest rates associated with each debt. If your interest rates are all a similar percentage, it makes sense to use the snowball method.

Or if you have a loan with a double-digit interest rate, you may want to pay off that debt first and then switch to the snowball method.

What’s most important is that you choose the debt repayment plan that you can stick to in the long run. Paying off debt is temporary but the process can last months, sometimes years.

Conclusion

Deciding to pay off small debts first is a great way to build momentum and excitement around paying off your debt. If you stick with the method long enough, you’ll find that you’ll eventually reach the point of having no debt at all!

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Comments

  1. Sanskar Innovative School says

    February 2, 2019 at 4:26 AM

    Hey matt great article keep posting the articles every day

    Reply
  2. Sourav Kumar says

    February 7, 2019 at 6:52 AM

    The article is a must-read for those who are planning to save while having several debts to be paid.

    Reply

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