Molly’s Money: How do you prioritize which debt(s) to pay off first?

February 21, 2013·


I’m back with another edition of Molly’s Money!

It’s been a few weeks since my last post and I wanted to get back into things with another reader question. If you’re new here, Molly’s Money is a financial series of blog posts that I write semi-weekly talking about ALL things personal finance. It all stems from my journey of becoming debt free and so here’s where I talk about what I’ve learned over the years in the hopes that someone won’t make the same mistakes I did. OR maybe it’s just for that someone who is in the same position I was.

So, this week’s question is:

“How do you prioritize what debt(s) to pay off first?”

This is an AWESOME question and one that I get A LOT. For anyone who has ever been in debt and struggled to climb your way out if it, this first step is often the hardest. Sometimes it’s like you have this mountain in front of you and you have no idea how you’re going to get over it.

Except the answer is always the simplest: one step at a time.

So, you have this mountain of debt and you’re overwhelmed and you don’t know what to pay off first. Well, there are a couple factors at work here that will lead you to the right answer.

When you’re in debt, the FIRST step is to figure out what kind of debt you’re dealing with. I’m not going to answer that question here because I’ve already answered it in a post before which you can read here.

Now, if you’re going the debt consolidation route, your debt, literally, gets consolidated so the answer to “What to prioritize?” pretty much gets answered for you.

But, if you’re in a manageable amount of debt figuring out what to pay off first can be tough.

If you’ve ever listened to Dave Ramsey, you may have heard of the “Debt Snowball.

This is definitely the method that I recommend.

Basically, the debt snowball is the method of starting with the SMALLEST debt and working your way up to the LARGEST debt.

So, basically, in a nutshell the debt snowball works like this:

  • You list your debts in list of smallest to largest (taking interest rates into account, too)
  • Start with that smallest debt and attack it like you’ve never attacked anything before. Put EVERY dollar you can into paying off that smallest debt. ALL the while, paying the minimum payments on every other debts. Do not, and I mean DO NOT ignore your other debts when you are paying off that smallest debt.
  • Once you’ve paid off that smallest debt, go to the next one and so on and so forth.

So why start with the smallest?

The truth is, it’s all a mental game. Think about it, if you spend all this time working at that largest debt and it takes forever to pay off, you’ll start to feel frustrated and tired and you’re more likely to give up on your plan than to finish the job.

BUT, if you start with that smallest debt and pay it off, and then pay the next one, and then next one, and so on and so forth, you’ll feel a sense of accomplishment. Those little “wins” are motivating and will only energize you to keep paying off the debt.

Know what I mean?

What about you? Have you heard of the debt snowball? Have you tried this technique? Are you in debt and plan on trying this method? Leave your thoughts, other questions, and feedback in the comments below!