Once you have decided to get out of debt there are two main schools of thought on how to do it. Either you pay the debt according to the balances, going from smallest to largest, or you pay them according to the interest rate, going from highest to lowest. Either of these methods are fine. I’m happy as long as you are paying off debt. Whatever gets it done, right?
But there is one more factor that I think should be taken into consideration. The payment.
Considering the payment is one tool, just like the interest rate and balance. You should consider the payment for several reasons.
- Freeing up the extra money every month gives you even more to pay down your other debts. You can get that debt snowball rolling quicker by freeing up some extra money sooner.
- Getting rid of a larger payment reduces your liabilities if things get sticky. In the back of my mind I’m always planning for a worst case scenario. How little could I live on if I had to? Getting those items with larger payments paid off reduces the minimum amount needed to live.
- Having smaller monthly bills due each month reduces the amount you need in your e-fund. You should have 6 months of bills in savings. If you pay off your car that had a $500 payment you can reduce the amount in your emergency fund by $3,000. This allows you to meet your other goals faster.
Of course every situation is different. And like I said, as long as you are paying down your debt I’m all for it. But the payment is one more thing to consider when deciding what path you are going to take on the journey to being debt free. Congrats, good luck, and let me know what I can do to help.