Today we’re continuing with our earlier credit card theme. Instead of maximizing points, we’re talking about accumulated debt. There are two main strats to paying off debt. The first is the “debt snowball”, which was popularized by a certain financial media personality. The second method is “highest interest”, which is the mathematically ideal option. Financial planners, while universally in agreement about the math, still disagree on which strat is meta.
Snowballing – Pay Off Debt With Extra Cash
The debt snowball tells you to cover debts with higher payments first. As you do so, you will free up more monthly cash flow to tackle the next debt with. If you have a lot of debts to attack and not a lot of cash flow, this strategy can help you free up more cash to use. In that way it works well. It also helps most people with the psychological aspect of debt payoff. Debts take a long time to get out of and the little wins you rack up along the way with the snowball strat can help refill your stamina, helping you stay dedicated to the big goal.
Interest Instead – Pay Off Debt Interest-First
The highest interest method is mathematically ideal, assuming your progress stays linear. By attacking the highest interest rate debt, you will pay the least amount of total interest (and therefore, total money overall) during the payoff. However, because you lack the buff of seeing your progress accumulate as available payments (ie: like in the snowball) you can run out of stamina and fail at the larger goal before the payoff is finished. You might be paying on a debt for months without seeing any new cash free up!
So What Should You Do?
So obviously planners will stay divided on this issue, but the financial part is clear. What is unclear is which of these strats more taps into your psychology and aids your personal quests. I find the debt snowball works best if there are lots of debts with varying payment amounts and that the highest interest strategy works best if there are few debts with larger balances. Either way, stay persistent and make progress each month. There is no fast way out of debt. That is, unless you can magically earn an extra $50,000 next week.
Read more about how to set up your household cash flow and pay off debts in my upcoming book: Achieving Accumulation. I hope to release it this August!