Solomon Islands Finance

Jun 25 2017

Debt Snowball – Highest Interest vs Smallest Loans First #debt #snowball,smallest #loan #first,debt


Debt Snowball Highest Interest vs Smallest Loans First

I like the momentum gained by paying the smallest loans first, but I also like the idea of eliminating several accounts quickly in case you run into a financial crisis. If I were to be laid off from my job, I probably wouldn t be able to keep all my accounts current. I d rather have to deal with calls from 7 companies instead of 14. Even if I never get laid off, I d like to simplify things as soon as possible. Keeping track of fewer debts is easier and can reduce stress.

Paying down the smaller amount actually gives you momentum and that sense of achievement so you are more motivated to keep going and pay off the rest.

I like the smallest loan first method as well because it frees up a little more cash quicker to work into the snowball. It also really does help psychologically to get something taken care of.

Eric J. Nisall says:

There is always debate about this type of issue, and here really is no best way to go about it, as long as the debt is being paid down.

My personal viewpoint would be to keep additional interest from compaounding, so the highest interest rate is what I would target first and put most of my resourses toward. Some people may feel that if they can erase a small debt completely even though they will incur more interest from other labilities that it will help them psychologically, and that s fine too. However, they will be staying in debt longer with that type of mentality, but if it happens to help people sleep at night, then I could not fault them.

I wrote about something similar that perhaps will better explain my view called

In the past I did a combination of the two. Knowing that it was cheaper in the long run, I d try to pay the highest interest one off first. But if there was one that was closer to being paid off, I d jump on that one first. Say I d had 6 things to pay off I d keep on the highest interest one, but also pay attention to the closest one to pay off and put extra on it.

There was not just a psychological boost in getting that lower one paid off there was a cash flow boost . the money from not having to pay that little one anymore could go toward the big one. Plus, in lower income times, it was just making things easier on the cash flow needed each month. Therefore, my way was a seesaw back and forth. Worked for me debt free and intending to stay that way

I really struggle with this one, since my mathematical mind tends to always win the argument. I understand the psychological benefits of paying off small loans and if it s a choice between paying off small loans first and just making minimum payments, clearly paying off is better. If the goal is to get out of debt completely, then doing so as quickly (and inexpensively) as possible is the way to go. If you can become disciplined enough to pay more than the minimum on any loan, I believe that you can do the smartest thing and pay the highest interest ones first. Track the money you re saving (or how much faster your debt is going away) by paying the highest interest loan first and you ll have all the motivation you need.

I have read Money Makeover and for me it is easier to pay off the lowest loans first. Being able to see what you have done is better then only paying for the highest loans. Making a chart for my debt payments has helped me. I like seeing what I have done and knowing that financial freedom is on the way.

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