Browse Month by November 2016
Dave Ramsey method, personal budgeting

Pay Higher interest debts or lower bills first??

I have heard two different ways to pay off the debts. First pay the higher interest ones first. The second, was pay off the lower debts first and then eventually add the money to the larger debts. Which method would be best?

Pay off the higher INTEREST debts first and work on the lower interest debts after that. Its costing you more for the higher interest debts.

The reason Dave Ramsey, and others, suggest paying the lowest balance cards first is what he calls the snowball effect. Once you have paid off one credit card, you become more psyched up about paying the next one off, and then the next. You will see results a lot faster this way.

My caveat to all of this is if you receive a windfall (tax return, Christmas bonus, etc.), pay off whatever will give you the largest cash flow. For me, I had corporate stock that I could not sell. When the company was bought, my corporate stock, which was held be Fidelity, was now in a cash account. When fidelity asked me how I wanted to invest it, I told them in paying off my wife’s car – send me the check. That freed up $400 a month which then went to paying off 2 other credits. So I have paid off 3 and have 4 more to go.

If you choose the highest interest rate first, you may get discouraged long before you arrive at your goal.