HelloMoney

The other day I get a frantic phone call from my husband at work stressed out that his loan we paid off last month was still being taken out of our account. After he calmed down I realized he was looking at a payment of the same amount as his old loan payment but applied to the next debt in the snowball line-up. “Oh, that’s the debt snowball” -silence- “What the hell is a debt snowball?”

My general debt pay-of plan has been to pay off my “worst” debt first. So I thought I would pay the off credit card, then the student loan, then the car loan. For some reason, these were in order of “I want to get rid of now” to “I can live with paying for this”. This was also the order of smallest to largest balance, which follows Dave Ramsey’s traditional Debt Snowball.

But why was I following this method? I had been conditioned to thinking I would always pay for a car note like a mortgage. This was stupid. The student loan, although higher in interest than the credit card, I thought should be paid off later because of it’s tax advantages. The credit card debt made me feel like a bad, stupid person, so i wanted it gone first. All these ideas that were forming my decisions didn’t come from concrete facts or numbers, they came from emotions and feelings.

Then I found a site that lets you calculate and track your debt snowballs. While inputing data I noticed you could select either “Interest Order” or “Balance Order”. This choice got me thinking.

The What’s the Cost website says:

“Logic says that you should pay off your debts in interest order: paying the debts with the highest interest first, while paying the minimum on your other debts. However, it’s been pointed out that some people prefer to pay off there smaller debts first, regardless of the interest rate.”

Once I wrote down the numbers, the interest rates, and the tax rates I saw everything in black and white and clear as day. I should be paying the largest interest rate debt first. The credit card had the lowest interest rate even when bearing in mind the tax advantages of the student loan. So, this one should be paid last even though I feel icky for having it. The car loan had the highest interest rate so it should be paid off first and I hope to never have a car note after that. Another error in my emotions- the tax advantages of the student loan seemed inflated in my head before I did the actual calculation. But now that I saw it on paper, I realized these emotions were clogging up my rationale and it would be much more practical and efficient to go from highest to lowest interest rate. Without realizing it, I had stumbled upon a debt reduction method called a Debt Avalanche.

Paying off debt is always good, no matter what method you use. Any method of debt reduction is better than no method! But I would also suggest taking a long-hard stare at the numbers using something like the Debt Snowball Calculator to be sure you are happy with your debt repayment plan.