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Optimal Finance Daily - Financial Independence and Money Advice
3423: What Debt to Pay Off First: A Simple Way to Decide What’s Best by Jackie Beck on Repayment Priorities
00:09:24
Jackie Beck explains why emotions, not logic, are the key to successfully paying off debt
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This is optimal Finance Daily what Debt to Pay Off First? A simple way to decide what's best By Jackie Beck of JackieBeck.com wondering what debt to pay off first? Once you're ready to go beyond just paying minimum payments on each one, typical reactions are to either try to pay just a little bit more than the minimum to all of your creditors, or try to decide which way will save you the most money. In other words, we try to figure out what debt to pay off first based on logic. Unfortunately, that can be complicated unless you owe the irs. In that case, they should probably top your list. Worse, trying to figure out what debt to pay off first based on logic isn't necessarily effective because borrowing money is rarely logical considerations. So instead, think about two things in making your decision about what debt to pay off first. Which debt would be easiest to pay off first, and which debt would you feel happiest about seeing gone? Easiest is going to be the one with the lowest balance simply because there's less of it. Most people who are struggling with debt will do better by paying the lowest balance debt first. Don't underestimate the importance of continuing to pay off debt. Put your debts in order from smallest to largest and get rid of the first one as fast as you can. When you're done, put that money towards the next debt on your list. This is the traditional approach to paying off debt. It's very effective because people are motivated by feelings. They feel great when they get rid of that first debt and so they keep going. Logic really doesn't play into it. Why logic matters least when it comes to which debt to pay off first. Think about how you got into debt in the first place. Chances are it's because you wanted things and didn't want to wait until you had the money to pay for it, for example. None of these behaviors are logical. Your pet gets sick and requires expensive medical treatment. You pay for it with debt because of course you love your pet. You decide that you need a new car right now, even though your old one could be fixed for a few hundred dollars. So you trade it in on a new one and end up with years of car payments. You go out to eat with your friends but use a credit card since you don't get paid for another two weeks. And you hate having company over because they'll see your mismatched furniture or empty.
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Rooms in your house.
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You know the house you bought before you were financially ready because everyone was buying a house at your age. So you take advantage of a 90 day same as cash offer to fill it with furniture. Note that I'm not saying there's anything wrong with helping your pet, getting a new car, eating out, buying a house or furniture, or any number of things you could do with your money if you can afford to do so. Also, chances are like me and every other human, you rationalize a lot of things. It's easy to confuse wants with needs. Rationalizing versus reality. For example. Most of those probably felt like needs, but realistically they were not. Rationalizing something as a need doesn't mean it's actually true. It just means you've made your brain align with what you wanted emotionally. If you had been logical, you wouldn't have gotten a pet you couldn't truly afford to care for in the first place. Maybe you'd pet, sit or help out at a shelter. Instead. You would have fixed the car, stayed home from dinner because you didn't have the money, shut the door to the empty room, or not cared what your friends thought and rented until you were really ready to buy. Instead, you borrowed money and agreed to pay extra for the privilege. Logic wasn't a factor in getting into debt, and it's not going to be the biggest factor in getting out. But what about is there a particular debt that's really weighing on you emotionally? That's where the question about which debt would you feel happiest about seeing gone Comes into play. Maybe you owe your parents $1,000 and every time you see them you feel like in fact you go out of your way not to see them anymore and it's ruining your relationship. If you're sick at heart over a particular debt, consider putting that at the top of The List when it comes to what debt to pay off first, just be sure your feelings are strong enough to carry you through to completion. Remember, a huge part of how to get out of debt is changing your behavior for good. And your behavior starts with your emotions, not logic or not Spock if you're still not convinced about what debt to pay off first, let's talk numbers. Worried about it taking longer? If you start with the lowest balance instead of the highest interest rate, do the math for your exact situation. For example, here's one situation I'm not sure which debt to pay off first. I have several debts with various interest rates and minimum payments. I'm making all of the minimum payments right now and have about $150 a month extra that I could put towards debt. I also have $4,000 in savings that I could use to pay something off right now. What would you pay off first and what order would you pay them off in? Here's how long it would take to pay them off. If you pay them down from highest interest rate to lowest, it'll take you four years and seven months to be debt free, assuming you never found ways to send an extra beyond the snowball that whole time, which is unlikely if you pay them down from lowest balance to highest balance. Instead, it'll take you four years and eight months a month's worth of interest on what will be by then. A very low balance is not worth agonizing over. Just pick one that feels right to you and start chipping away at it. Then stick with it until they're all gone. Sticking with it is what matters most, along with getting started. You just listened to the post titled one what Debt to pay Off First. A Simple Way to Decide what's Best by Jackie Beck of JackieBeck.com One of.
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At heart, I wanted to pay off my 30 grand of debt in my late 20s in the most optimal way. So I went with tackling the highest interest rate first, otherwise known as the debt avalanche method. I think I solved for the emotional benefit you get with the snowball method, which is tackling the debt with the lowest balance first. Because I used a debt reduction calculator, it helped me visualize the finish line which kept me motivated. But I completely agree with the advantages of the debt snowball. And I love how Jackie pointed out that the amount of time you may be saving with the avalanche method isn't worth agonizing over. Personal finance is less about the math and more about behavior, habits and mindset. The order of paying off my debts wasn't what changed my life, rather it was the mindset shift to dramatically lower my spending and aggressively pay down debt so that I can invest that has put me on the path to financial independence. If I was still swiping my credit card with abandon, it wouldn't matter how cleverly I sorted my debts or how expertly I chose a high yield savings account. That being said, if you're an overanalyzer Remember to give the spreadsheet a break sometimes and focus on the personal part of personal finance. Do what feels right and focus on the big stuff that matters. And that's another edition of Optimal Finance Daily. Thanks for being here today and making another episode possible. And be sure to come back tomorrow for more where your optimal life awaits.