Debt is one of the few self-inflected wounds you can survive while still being miserable. Debt doesn’t just happen. It’s the result of something: poor decisions with big purchases like homes, lack of emergency preparedness, and lots of small poor decisions come to mind.
Photo by alancleaver2000 via Flickr
Nonetheless, debt is almost always caused by our actions.
It can be painful to admit our debt was due to our actions, but it truly is empowering when you think of it like that.
How’s that? Because if you got yourself into this mess with your actions, your actions will get you out of it. That’s what we’re going to talk about today.
There are multiple methods popular in the media on paying off debt:
Here’s a newsflash for you: it doesn’t matter.
Seriously. The difference between paying off the lowest balance versus the highest interest rate, for most people, will amount to less than $10,000. (And that’s only for people that are way in over their heads in debt.)
Now I’m not saying $10,000 isn’t a lot of money, because it is.
But there’s one thing more important: starting to pay off debt in any way possible. Stop talking tactics and strategies; get to work!
Let’s take the Average Family. The Averages have two car loans, a house payment, and some credit card debt. They have enough money to make all of their payments plus $170 extra each month to help knock their debt out faster.
This is what their debt looks like:
How do the two methods (debt snowball vs. highest interest rate) pan out?
With the debt snowball method the Averages would pay off their debts in this order:
Total interest paid: $2,130.50.
Not bad, but let’s look at the highest interest rate method next. This is how the debt would be paid off:
Total interest paid: $1,741.41.
Some of you are thinking wow, that’s a savings of $389.09. But let me remind you: over 20 months, that’s less than $20 per month in savings.
So is it important how you pay off your debt? Sure. It does, mathematically, make better sense to pay off the highest interest rate debts first.
But the bottom line is paying off debt in any method is going to save you more interest than not paying off debt. No matter what method you choose, just get going on paying it down.