What debt should I pay off first? Mathematically speaking, you are better off paying the highest interest rate balance first to pay the lowest amount of interest as you can. There is another school of thought to pay off the lowest debt balance first, but that is only recommended in limited circumstances.
I’ve never had multiple kinds of debt at once. I kept my debt amounts as lowest as possible and the only debt I carried were personal loans and student loans. However, I never carried both balances at the same time. The student loan was also interest free for six months so I had zero incentive to pay it down early.
However, if I had two kinds of debt at the same time, I would pay off the highest interest rate debts first, otherwise known as the debt avalanche method. You end up paying less interest overall and you will always end up at a better place than the alternative. There are exceptions to this rule but it’s a general rule of thumb that you should abide by.
The rules are different for everyone as it’s not a one size fits all rule. You have to know who you are and what tendencies you have first before you decide which course of action to take. It’s just fantastic feeling to know that you don’t owe anything to anyone else in the world.
The two schools of thought conflict with each other in the personal finance community but there is a clear cut winner. When you’re asking, “which debt should I pay off first?” you should pay off your highest interest rate first, in general terms. However, let’s explore these two important and different ideas together.
Why Pay Off the Highest Interest Rate Debt First?
The most obvious answer is that it is MUCH cheaper in the long run. Did you know that the average credit card interest rate is 16.15%? That is a ridiculous amount of interest rate that credit card companies are legally allowed to charge you.
Regardless, if you’re struggling with paying off your highest interest rate balance first because the balance is too high and it’s too big of a mountain to climb, change your mindset. Instead of looking at it as how much money you’re saving in interest payments, look at it as how much money you’re earning.
You’re earning 16.15% return on your money just like at the snap of your fingers by paying off credit card debt. Completely and utterly risk free. How great is that? Many people think of saving as a “scarcity mindset” thing and people see making money as a “dominant” thing.
Therefore, if you think of it as making a 16.15% return on your money, the process becomes easier.
One way to answer which debt should I pay off first is to SMASH that social share button and post to your favorite social media! You might just have that friend with a lot of debt who could use an article like this. It can dramatically improve their personal finances.
If you can completely save your friend’s debt situation by doing a free thing like sharing an article, why wouldn’t you? Let’s share the information to improve the financial lives of everybody!
The smartest approach you can take with your debt is to pay off your highest interest rate balance first. Then with all the extra money you have, you can use that extra money to pay off even more debt. The progress is faster.
Exception to Paying the Highest Interest Rate Debt First
When you estimate it will take over a year to pay off your debts, then that’s the exception. One year is an eternity amount of time. After doing the same thing over and over again, you will get sick and tired of it. You will need some kind of a complete win to motivate yourself to keep moving forward.
After you’ve been paying highest interest rate debt for months, then you can change course and pay off your lowest balance debt first for another couple of months. Once you feel the motivation again with the small wins, you can get back to paying off your highest interest rate debt.
It may feel overwhelming to look at a $10,000 debt balance and cause you to give up midway. Therefore, you need some kind of a win in-between those times. Between when you want to give up and when you start your debt free journey.
Whenever I carried student loans, it felt annoying to have that balance linger into my psychology every day. I almost gave up paying off debt that steadily. One day, I felt enough was enough and I used all of my savings to pay off all of that $4,000 debt.
I understand how frustrating it feels to work 40+ hours every week only to realize you have to use your funds to pay off somebody else. It’s almost like your employer isn’t even your employer. It’s your creditors. To remedy and accommodate for this possible downside, you can combine the two approaches together.
There are few rules that work 100% of the time. Therefore, it’s not a bad idea to combine the good sides of both approaches to answer the question which debt should I pay off first? You can have your cake and eat it too.
The Snowball Method Approach to Debt and When It Makes Sense
Another answer to the question “which debt should I pay off first?” is the debt snowball method. The debt snowball method is when you sort your debts according to the lowest debt balance first to the highest. Then you pay off the lowest debt balance first and move up from there until you snowball into the higher debt balances.
The debt snowball method’s idea is that when you pay off your lowest balance debt first, it gives you motivation. However, you pay more interest through this method by the end of it. Furthermore, in either method, you’re going to have to face your high balance debt eventually anyway.
However, you are more likely to achieve the goal of being debt free because of the extra motivation. Furthermore, it could turn out to be a self fulfilling prophecy. The extra momentum might motivate you to even pay off even more debt going forward.
We generally appreciate the little things in life more than the big things in life. Therefore, the small but frequent victories can have monstrous results. When figuring out which debt to pay off first, you first have to understand and know who you are. Are you the kind of person who needs motivation to keep tackling your goals?
Then the debt snowball method is the way to go. Money is an emotional subject and it may touch you emotionally in ways you never even considered.
What’s more important? Paying the lowest interest you possibly can or actually following through with the goal of being debt free? There’s more freedom with the latter than the former.
There are positives and negatives to both approaches. It’s up to you to figure out who you are so you can apply the right method.
If You’re Having a Hard Time, Consider Refinancing Debt
Instead of answering “which debt should I pay off debt first?” you can answer “how can I pay off debt, period?” The simplest and easiest way to pay off debt is to refinance a higher interest rate debt with a lower interest rate debt.
Consolidate your credit card debt into a personal loan that has a lower interest rate. It’s one of those decisions that doesn’t require additional complicated effort on your part.
All you have to do is put in information, apply, and then you’re home free. You don’t need to figure out how to make more money, all you have to do is apply. If you’re having a hard time paying off debt in the first place, then consider refinancing your debt and run the numbers to see if it’ll be cheaper.
Interest rates are at an all time low and banks are fighting like crazy to compete for your business. It’s a buyer’s market. When you bring a competitor’s offer to your own bank, chances are high that they’ll beat it. They might not, but the chances are good that they will.
Banks’ margins are under pressure. When margins are low, what do they have to do? They have to make up in terms of volume. That’s why refinancing your debt can make sense. Banking is a commodity. Whether you pay money to one bank or another, there’s are subtle difference but not material ones, most of the time.
If you can play the banks together and beat them at their own game, why wouldn’t you? Remember that they wouldn’t lose a minute’s worth of sleep to drop you in a heartbeat. Especially if you’re not a profitable customer. Refinancing debt is nothing personal. It’s just business and doing what’s best for you.
Whichever Debt You Pay Off First, Just Pay Off Debt
The debt snowball method stands no chance against the debt avalanche method. Mathematically speaking, the snowball method is not the best route to take. Behaviorally speaking, it’s the best route to take.
If you’re the kind of person who can practice delayed gratification very easily and actually follow through with paying off debt, then the debt avalanche method is the way to go. Therefore, you should use the method to your advantage in any way that you can.
However, whichever debt paying method you choose, what’s important is that you should just pay off debt. Being debt free is much more important than figuring out which method will help you the most down the road. Optimization can be important but it’s not as important as actually going out and doing it.
When you ask “which debt should I pay off first?” the world will FOREVER be divided by the two methods. It’s been a point of debate in the past, present, and it will continue to be so in the future. Instead of listening to the two schools of thought who’ll just shout louder, just go out and pay off debt.
Remember that feeling of not knowing whether you can meet the next debt payment is horrible. The feeling of not knowing whether the bank will take away your car or house today or tomorrow. It’s stressful and agonizing to have those feelings weighing down in your shoulders.
Free yourself from those feelings. A clean slate does wonders for your overall health and mental health. I am completely debt free and knowing that 100% of my next paycheck is mine helps my mentality. Therefore, whichever method you choose, what’s important is that you actually do pay off debt.
Mortgage Debt Should be Paid Off Last
Now that you got an answer to the question on “which debt should I pay off first?” the next question is which debt should you pay off last. Mortgage debt is the last of the debts that you should pay off. Why? It is one of the lowest interest rate debts ever. Especially more so, these days.
In January 2021, I inquired about a possible mortgage because I was looking for houses. Do you know how much the bank quoted me? 2.25%. What?! That’s as close to the definition of free money as you can get. One of my best friends family refinanced their loan in April 2021 at 1.75%.
It’s like banks are just giving money away. While not having mortgage debt feels freeing, it’s one of those debts that you can have without feeling guilty. Whether you pay it off or whether you keep it won’t make a lot of difference. However, the optimizing choice is to keep it for as long as you can.
People are refinancing their homes at a rate that’s unseen. They’re taking advance of the record low interest rates. What’s even shocking is that low interest rates I think are here to stay for a long time. The Fed figured out that’s the key to continuous economic boom.
There’s a good chance you’ll earn more money on your investment returns than by paying off the mortgage. Results aren’t guaranteed, of course. However, the average stock market return of 7% will most likely be higher than the 2% – 3% mortgage interest.
That’s what people in the personal finance community likes to call “good debt,” which makes it fine to be paid off last.
