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icedpea
BucketHead
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|  Posted: 1/29/2013 12:19:30 PM
Which order would you pay off your debt? Credit cards, car loan, then student loans? | |
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2peafaithful
People not perfection
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 | Posted: 1/29/2013 12:21:11 PM
Smallest to largest! I am a Dave fan so that is my perspective. | |
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Kerri W
Ancient Ancestor of Pea
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 | Posted: 1/29/2013 12:21:28 PM
Whichever had the highest interest. | |
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icedpea
BucketHead
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| Posted: 1/29/2013 12:29:38 PM
2peafaithful - That's what I thought.
Kerri W - I'm an idiot when it comes to how interest works (i.e. credit card vs. student loans).
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benem
Yo, that's fifty dollars for a T-shirt.
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 | Posted: 1/29/2013 12:50:45 PM
Dave does the Debt Snowball. So you pay off the smallest as soon as possible then add that payment to the payment for the next largest and pay it off even faster.
Personally I would not pay my $50,000 in student loans off before I paid off a $10,000 car loan. I would never get what Dave calls "traction" that way. |
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icedpea
BucketHead
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| Posted: 1/29/2013 1:14:20 PM
Thanks benem - I read your post on the other Dave Ramsey thread. I don't need the class or the book now. I loved your explanation! | |
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ERICA G
BucketHead
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 | Posted: 1/29/2013 1:19:37 PM
If I may ask a question regarding bill paying: should you be on time with the payment or a month ahead? |
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eebud
Doxie Pea Mom
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October 2002
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| Posted: 1/29/2013 1:28:24 PM
Credit cards, car loan, then student loans?
I am not a Dave Ramsey pea but I do think he has a lot of good ideas and I like his plan for helping people be financially secure. When it comes to these loans however, the student loan, regardless of the size of the loan, would be the last thing I would pay off. The reason I would hold off on it is because you can write off this interest on your taxes. That can be a large amount of money. I would eliminate the interest that was being completely thrown away first. |
 
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Super Soda
BucketHead
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July 2006
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 | Posted: 1/29/2013 1:37:24 PM
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When it comes to these loans however, the student loan, regardless of the size of the loan, would be the last thing I would pay off. The reason I would hold off on it is because you can write off this interest on your taxes. That can be a large amount of money.
-------------------------------
There is a cap to the amount of student loan interest you can deduct, and it's not all that much. Also, it phases out a high incomes. (Frustrating since the high income is directly related to high student loans!)
But I agree that the student loans would be last except for mortgage. They are generally larger and lower-interest than other loans. |
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divinghkns
PeaAddict
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| Posted: 1/29/2013 1:38:58 PM
If I may ask a question regarding bill paying: should you be on time with the payment or a month ahead?
If you are paying a bill that comes monthly, and isn't a debt - for example a utility bill or a phone bill - then as long as you pay it on or before the due date each month you are fine. No reason you need to be ahead.
If you are trying to pay down debt, once your monthly needs/bills are paid (i.e. you need to keep current on your utilites, phone, rent, mortgage and minimum payments on all debt) you should put any and all extra towards the debt you are working on. Do that as often as you can even if it means "being ahead" a month or two or three. Once that debt is wiped away, you take all the extra money you were putting towards that debt and put it towards the next debt you are going to work on, while still making minimum payments on everything else.
So, for example, if you have $1000 on a credit card, $3000 on a car note and $10,000 on student loans, you would go ahead and pay the minimum payments on the car and student loans each month (but not a month ahead). Then put any extra you have to the $1000, at least making the minimu payment. Once that's gone, put all the money you were putting towards the credit card, plus any extra toward the car. That's why he calls it a snowball...the more you get paid off, the more money is freed up to put towards other debt, thus giving you traction to eventually make some bigger payments towards the final, larger debts.
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Yubon
lunch is for wimps
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 | Posted: 1/29/2013 1:47:34 PM
I'm an idiot when it comes to how interest works (i.e. credit card vs. student loans).
I'm afraid to ask, but you do at least know what the interest rates are on your credit cards and student loans are, right? |
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divinghkns
PeaAddict
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| Posted: 1/29/2013 1:55:47 PM
Which order would you pay off your debt? Credit cards, car loan, then student loans?
Dave Ramsey would tell you to pay off the smallest non-mortgage debts first and then work your way to the largest, regardless of the type of loan or the interest rate. His reasoning for this is primarily a psychological one. You will feel victorious when you get the first one paid off and it will give you motivation to move onto the next one. A second reason for it is it frees up money each time you move to the next step so that you can snowball it into bigger and bigger payments.
Other financial experts, like Suze Orman, would tell you to eliminate the debts on which you'll pay the most interest first. Her theory is that it will save you money in the long-term because you wouldn't be paying as much interest.
I'm a huge nerd, so when I first started Dave Ramsey's Financial Peace, I created a big ol' spreadsheet with debt amounts and interest rates and projected budget to figure out which way was better for me. I decided if Suze's way was better with me, I'd go with it, because I don't need the psychological boost from Dave's way. However, for me, Dave's way actually got me out of debt more quickly and by paying less interest. That may not work for everyone's situation depending on the size of the debts and interest rates on those debts, but for me it was win-win because I got to stick with Dave's way and still know I was doing it quickly and w/o losing as much money to interest.
Good luck whatever you decide! | |
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pennyring
Thrift Ninja
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| Posted: 1/29/2013 1:59:56 PM
Dave Ramsey gives horrible advice in this regard. Do not listen to it.
What you SHOULD do is pay off the highest interest debt first. Then the next highest, and so on.
This kind of thing is easy, guys. Don't let so-called "gurus" make it more complicated than it needs to be.
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icedpea
BucketHead
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July 2012
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| Posted: 1/29/2013 2:03:32 PM
Yubon - I am an idiot when it comes to how interest accrues differently with different types of loans. I am not an idiot in general. I do know what my interest rates are.  | |
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icedpea
BucketHead
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July 2012
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| Posted: 1/29/2013 2:05:04 PM
pennyring - I like your advice. Maybe you should be a financial advisor.
That Orman chic annoys me. Why is she always yelling? | |
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busypea
boring + nerdy
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| Posted: 1/29/2013 2:14:07 PM
Highest interest rate first. | |
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Yubon
lunch is for wimps
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| Posted: 1/29/2013 3:12:23 PM
Yubon - I am an idiot when it comes to how interest accrues differently with different types of loans
It doesn't.
pennyring - I like your advice. Maybe you should be a financial advisor.
That Orman chic annoys me. Why is she always yelling?
That's funny, because pennyring just said the exact same thing that "Orman chic" has been saying for years. (and they're both right, BTW) |
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icedpea
BucketHead
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| Posted: 1/29/2013 4:01:03 PM
I didn't mean she annoys me with her advice. I'm sure she is right. I just couldn't listen to her, because
she annoys me. | |
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CnBsmommy
PeaAddict
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| Posted: 1/29/2013 4:16:28 PM
the reason Dave says to pay off the smallest debt is that it gives the person momentum & a sense of accomplishment. It allows them to feel that they can get out of debt. For many, it truly is a mind game with them. They need to see they are actually getting somewhere. While it may seem bad advice when you look at the numbers, the fact that it causes people to stick to getting out of debt makes it more effective for most.
Therefore, it's not horrible advice. | |
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footballchick1
PeaNut
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| Posted: 1/29/2013 5:18:36 PM
Follow Dave Ramsey's steps -- first you should have at least $1,000.00 in an emergency fund. Next, start paying of debt smallest to largest. | |
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busypea
boring + nerdy
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October 2002
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| Posted: 1/29/2013 5:23:54 PM
the reason Dave says to pay off the smallest debt is that it gives the person momentum & a sense of accomplishment. It allows them to feel that they can get out of debt. For many, it truly is a mind game with them. They need to see they are actually getting somewhere. While it may seem bad advice when you look at the numbers, the fact that it causes people to stick to getting out of debt makes it more effective for most.
I understand his reasoning and still think it's crappy advice. To advise someone that it's better to pay more in interest and take longer to pay off debt because it psychologically feels good is not the right message about financial management IMO. In fact, I would say that's exactly counter to what people need to learn in order to manage money well. | |
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Yubon
lunch is for wimps
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| Posted: 1/29/2013 6:06:55 PM
Yeah, I can't stand Dave's "snowball effect" crap. I'll take basic math over psychology any damn day of the week. Besides, psychological issues are what got most people into debt to begin with.
But hey, every one of these quacks needs a gimmick that sets them apart from all of the other quacks. This is Dave's. |
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VexedAngel
Cold Pea on a Cracked Plate
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 | Posted: 1/29/2013 6:07:52 PM
BusyPea, it's not a personal rule that any of us, Dave included, is forcing you to follow.
We did it that way (kinda) and I have no regrets. It really was a negligible $$ difference for us. |
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busypea
boring + nerdy
PeaNut 52,817
October 2002
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| Posted: 1/29/2013 8:46:52 PM
BusyPea, it's not a personal rule that any of us, Dave included, is forcing you to follow.
We did it that way (kinda) and I have no regrets. It really was a negligible $$ difference for us.
Of course no one is being forced to do anything. However, Dave Ramsey's plan is touted a lot here as a the end-all, be-all of debt reduction. It's not.
Maybe the difference was negligible for you, but for many, it would not be. People should know what they are getting into and make sure they are truly comfortable with paying a potentially significant premium for *feeling* like they are making progress when in fact a different approach would make *actual* progress more quickly.
You can share why you think Dave Ramsey is great and I can share why I think he's not. | |
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momofkandn
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| Posted: 1/29/2013 9:27:58 PM
From what I've read many financial experts agree that you pay off your revolving debt first (credit cards), unsecured or personal loans next (401K loans), then secured loans like a car, and then loans with tax deductible interest (student loans and mortgages).
How you tackle each category of debt and in which order you pay off things like multiple credit cards really depends on you, the balances, the interest rates and your own level of motivation. Do whatever works for you. As long as the debt is paid off, who cares how you got there. Do some math and figure out which method will work the fastest and most effectively for you. If you are someone that needs the satisfaction of paying off a credit card and cutting it up, use Dave's method. If you are someone that wants to pay the least amount possible to pay off all the cards, then go with the highest interest rate first.
I have a family member that was so deep in debt that after all her bills and monthly payments she only had $50 extra to pay down her debt. For her, paying $50 extra towards a 10,000 credit card balance at high interest was discouraging and she felt like she was getting no where. Many months she just spent the $50 and didn't pay anything toward the debt. She decided to try Dave's method and put that $50 towards the lowest balance card. She paid that off pretty quickly and then let the money snowball into paying off the next card. It worked for her and she's about half way now to paying off all her cards.
For me, I needed to pay the highest interest rate first. It bugged me to pay all that extra interest. And I could see that even if the balance went down in small increments, that interest charge was also going down and that gave me the motivation I needed.
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JnJsMom16
BucketHead
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 | Posted: 1/29/2013 10:57:26 PM
I feel whatever way works for you. Mentally for me its pay the lowest amount off first then go on to the next. If the highest interest is the highest debt and I keep paying, yes it will go down. But if I pay something off completely, even if it was small, I feel like I am making progress and that feels good. That feel good feeling can keep me motivated, even if it costs me a few more dollars in interest. |
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pennyring
Thrift Ninja
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| Posted: 1/29/2013 11:03:35 PM
How is seeing interest pile up on a high-rate card a "feel good" move? You may be paying $50 a month toward one card, meanwhile, another is charging you $65 in interest. It's nonsensical. It's like putting additional blinders on the problem, instead of stripping it bare, recognizing it for what it is, and attacking it in the most efficient way possible.
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Kiwi-Jo
kiwi: a cute bird
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| Posted: 1/30/2013 2:38:58 AM
the reason Dave says to pay off the smallest debt is that it gives the person momentum & a sense of accomplishment. It allows them to feel that they can get out of debt. For many, it truly is a mind game with them.
So does he think everyone thinks and reacts the same?
It would completely do my head in, to work on the smallest debt first, just because it is the smallest debt.
I would forever be thinking "yeah, but what about the even bigger debt that is still sitting there. This is hard work, and it's going to get even harder with that big debt still to go. I will never get out of this."
Whereas if I was working on a big debt I would be thinking to myself "thank goodness this debt is starting to reduce, and when it's done there is only the squiddly little one to go. Yay, I'm really making progress."
In actual fact, like others on this thread, I would work on the one where I am paying most interest first, and definitely leave the mortgage to the last one, and student loan to the second to last.
But if it had to based on the size of debt alone, I would much prefer to chip away at the biggest one first, rather that be constantly thinking of it sitting there, not being attended to, and getting even bigger by the day. |
**Disclaimer: Any errors in spelling, fact or tact are transmission errors.
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VexedAngel
Cold Pea on a Cracked Plate
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| Posted: 1/30/2013 7:03:47 AM
Busy, yes, of course. I think if people took FPU or read the books, it is explained thoroughly, both pros and cons. Plus, any reasonable person with an ounce of common sense will do what works for them. If they've only ever heard it on the radio show, well, he comes off as a blowhard there quite often and people wouldn't get the full gist of his advice. It probably helped that we didn't have car or CC debt.
Anyway, some people (not necessarily you, I see it often here) are so over-the-top offended by his philosophy, when it's just advice, that's all I meant. |
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writermom1
Thrift Whisperer
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November 2003
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 | Posted: 1/30/2013 7:22:50 AM
What the offended so often fail to grasp is that they are patting themselves on the back for the *obvious* financial and debt management savvy they are so proud to possess while DR is trying to put out fires in people who struggle to see finances and debt the same way.
Getting all uppity over what works for others because its not "your way" is like getting all worked up that WW or Jenny Craig is advising something different than what worked for you. 
Some people truly have no "extra." A tiny windfall of $300 to a $3k loan is a one time extra payment only to return to paying minimum only. Meanwhile, paying off a small debt may free up that monthly payment that can now be applied every single month to the $3k debt.
For some people, not Perfect Peas of course (all are financially savvy with gifted children and pets  ) this is the only way they find "extra" in their budget to apply toward debt |
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PeaCeaRyder
BucketHead
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February 2009
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| Posted: 1/30/2013 9:11:25 AM
I feel whatever way works for you. Mentally for me its pay the lowest amount off first then go on to the next. If the highest interest is the highest debt and I keep paying, yes it will go down. But if I pay something off completely, even if it was small, I feel like I am making progress and that feels good. That feel good feeling can keep me motivated, even if it costs me a few more dollars in interest.
I think that for many people, paying off debt is psychological, so if paying the smaller off first helps, then I see nothing wrong with it. Once those smaller bills are paid, you have even more money to pay off the larger debt. In any case, getting those bills PAID is the main thing. If you do that, then kudos for you, no matter how you managed it.  |
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kimberleigh13
"It's Christmas and we're all in MISERY!"
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March 2002
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Loc: Lost in my own head! ;-)
| Posted: 1/30/2013 10:18:00 AM
Does anyone remember the Living Like No one Else forums? I cant seem to find it anymore. I loved that board! | |
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writermom1
Thrift Whisperer
PeaNut 114,407
November 2003
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| Posted: 1/30/2013 10:58:50 AM
the reason Dave says to pay off the smallest debt is that it gives the person momentum & a sense of accomplishment. It allows them to feel that they can get out of debt. For many, it truly is a mind game with them. They need to see they are actually getting somewhere. While it may seem bad advice when you look at the numbers, the fact that it causes people to stick to getting out of debt makes it more effective for most.
I understand his reasoning and still think it's crappy advice. To advise someone that it's better to pay more in interest and take longer to pay off debt because it psychologically feels good is not the right message about financial management IMO. In fact, I would say that's exactly counter to what people need to learn in order to manage money well.
I think what many miss is DR is more a "how to control spending" approach with debt reduction only part of an equation.
If taken out as a stand alone it can seem to make no sense. If you owe $3k for 10% and $300 for 5% then it seems a no brainer to apply the extra to the $3k. If, however, there really is no extra - ever - you are going to simply pay the minimum payments forever.
If you have a $300 windfall, to pay the $300 debt OFF and thus free up even an extra $10-$20 per month to put toward the $3000 makes more sense to someone who has never had "extra" before. By getting rid of that smaller payment they now have what they used to send there to start piling on the larger debt. At the onset it is less about overall debt reduction and more about cash flow.
People are seeing this as "one or the other" when for many the choice is Dave's way or they aren't doing debt reduction AT ALL. Taken in that context, the math works. His advice is less about how to effectively manage debt as it is to get out - and STAY OUT of debt forever. If done right worrying about interest rates should be a thing of the past.
Might not be the way you or I would work it but if it works for someone else who otherwise would do nothing - I'm happy for them. Just like dieting and other life situations there is not a one size fits all solution.
There also seems to be a willful need to refuse to acknowledge that for some there is no "extra." They don't drink $4 coffee, they've already cut to the bone, the only way they get anything "extra" is paying off something manageable and applying that money to the next bill. It's really not that hard to grasp.
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VexedAngel
Cold Pea on a Cracked Plate
PeaNut 156,343
July 2004
Posts: 5,122
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| Posted: 1/30/2013 11:48:21 AM
Yes, writermom, exactly!! |
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CMRA
PeaNut
PeaNut 577,483
January 2013
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| Posted: 1/30/2013 12:22:36 PM
I put our debts into power pay dot org and played with the variables to see how they would impact our payoff date and the interest savings by using the DR method vs highest interest first. We are doing highest interest first.
If someone isn't highly motivated then I think the Dave R method helps...some people need the big wins to keep them going. I know you didn't ask about budget but I really like YNAB (you need a budget) it is basically virtual cash envelopes. It forces me to be accountable unlike Mint that shows me where I spent - after the money is gone. | |
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ca angel
PeaAddict
PeaNut 400,602
November 2008
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Loc: So Cal
| Posted: 1/30/2013 1:19:57 PM
CMRA- Can YNAB automatically or manually download bank transactions (CC, Checking, etc?). Also does it have an Android app?
I'm really frustrated with the programs that just show what you have spent vs planning how to spend.
ca angel | |
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icedpea
BucketHead
PeaNut 562,203
July 2012
Posts: 810
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| Posted: 1/30/2013 1:22:44 PM
Wow, this has turned into quite a debate. I guess people really do fight the most over money. | |
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writermom1
Thrift Whisperer
PeaNut 114,407
November 2003
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Loc: At the intersection of Hooterville and Stars Hollow
| Posted: 1/30/2013 2:10:19 PM
Ca angel I just started with quicken 2013. I've been a Quicken user but the new Mobile feature is nice for planning and tracking your expenditures on the go. |
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ca angel
PeaAddict
PeaNut 400,602
November 2008
Posts: 1,599
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Loc: So Cal
| Posted: 1/30/2013 2:43:59 PM
Thanks writermom1. I had asked a few days/week ago about the new quicken ap. I did read that the budget feature is better. Does it work well with the dr envelope concept?
Ca angel | |
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busypea
boring + nerdy
PeaNut 52,817
October 2002
Posts: 25,493
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Loc: Oregon
| Posted: 1/30/2013 3:02:52 PM
the only way they get anything "extra" is paying off something manageable and applying that money to the next bill. It's really not that hard to grasp.
I don't think anyone is arguing against the debt snowball concept. There's nothing wrong with that. What some of us disagree with is how he recommends ordering things in the debt snowball. He says the smallest debt should come first. I - and others - say highest interest rate debt should come first. | |
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~Laurie~
aka momtoemily
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January 2003
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Loc: South Dakota
| Posted: 1/30/2013 3:57:06 PM
He says the smallest debt should come first. I - and others - say highest interest rate debt should come first.
First, don't get me wrong I agree with you. It would also be my method of attack. I am interested/curious in his wealth building plan and paying off my mortgage early so I am currently reading Dave's book and he even says in there that it makes more sense to pay off higher interest rates first. However, he also basically says face it people who have absolutely no wiggle room in their budget and have a bunch of maxed out credit card debt weren't making mathematically smart decisions to begin with or else they wouldn't be in the situation they are in.
It is just like a previous poster said...the idea is that if you come across extra money pay that smaller one off which will free up that minimum payment so you can apply more to that other one. He also points out it is similar to dieting. If after 3 weeks you haven't seen any benefits from exercising and cutting calories you most likely will start lapsing in your good choices and start going back to the bad choices.
Like Penny said this isn't rocket science. However, it also isn't rocket science to see why his advice would work for a certain population of people. I thought it was insance advice too but after reading the book I *get* what the reasoning is behind it. |
Laurie
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busypea
boring + nerdy
PeaNut 52,817
October 2002
Posts: 25,493
Layouts: 145
Loc: Oregon
| Posted: 1/30/2013 4:02:04 PM
basically says face it people who have absolutely no wiggle room in their budget and have a bunch of maxed out credit card debt weren't making mathematically smart decisions to begin with or else they wouldn't be in the situation they are in.
Sure, I get that. But I disagree that the appropriate way to fix that is to encourage them to continue making mathematically poor decisions.
I really do understand the psychology behind what he's advocating. I just happen to think that it reinforces bad behavior - making financial decisions based on emotion.
It absolutely does work for some people and great for them. I'm truly happy for anyone that is able to get themselves out of debt, however they do it. | |
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Burning Feather
I conceived but I can't see you
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July 2004
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writermom1
Thrift Whisperer
PeaNut 114,407
November 2003
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Loc: At the intersection of Hooterville and Stars Hollow
| Posted: 1/30/2013 5:13:43 PM
the only way they get anything "extra" is paying off something manageable and applying that money to the next bill. It's really not that hard to grasp.
I don't think anyone is arguing against the debt snowball concept. There's nothing wrong with that. What some of us disagree with is how he recommends ordering things in the debt snowball. He says the smallest debt should come first. I - and others - say highest interest rate debt should come first.
The debt snowball is freeing up a payment to get a little "extra" to apply to the next largest bill, and so on. That's the debt snowball. It rolls and gains momentum as more smaller debts, paid off, are rolled into the now available money to hit that larger debt harder.
For some, if not done this way they flat out don't have any "extra" to apply to the largest/highest interest debt. So they never do and pay minimum payments in perpetuity.
I mean this with all the respect in the world but I truly think some people are just unwilling - or unable - to see that we are often talking about people who are maxed out making minimum payments. They can never pay 'extra' until a smaller debt is paid off. Period.
If it takes paying off the smaller debt to find some wiggle room to add to the larger I'm all for whatever ethical method works for a person.
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busypea
boring + nerdy
PeaNut 52,817
October 2002
Posts: 25,493
Layouts: 145
Loc: Oregon
| Posted: 1/30/2013 5:20:05 PM
No, not arguing against the debt snowball. Start with the debt with the highest interest rate. Pay that off as quickly as you can, using every penny you can eek out above the minimum payment. Once it's paid off, add the payment from that one to the payment on the next highest interest rate debt until it's paid off. And so on. It's still snowballing and gaining momentum because the payment from each paid off debt rolls forward to the next debt. It's just a different ordering of those debts - one that will minimize the total interest paid, thus saving you money in the long run. | |
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writermom1
Thrift Whisperer
PeaNut 114,407
November 2003
Posts: 22,401
Layouts: 66
Loc: At the intersection of Hooterville and Stars Hollow
| Posted: 1/30/2013 5:40:34 PM
No, not arguing against the debt snowball. Start with the debt with the highest interest rate. Pay that off as quickly as you can, using every penny you can eek out above the minimum payment.
But how would you advise someone who has:
$250/mo toward a credit card with a 14 year term
$50/mo toward a smaller debt with a shorter term
They have $300/month to put toward these debts.
They can keep plugging along as they are with a few eekings of extra here and there and it will take 14 years to pay off the larger loan. Their tiny bit of eeked out extra makes a negligible difference in the balance. You maybe get that down to a whopping 13.6
Or, they can eek out any extra to pay off smaller debt because it will go away more quickly and free up a whole $50/month to apply toward the larger debt.
The general advice is, of course, to pay off highest interest first but if that doesn't work for the budget in front of you - find the (legal) method that does.
The best solution, of course, is not to have debt in the first place.
I don't think there is any one right answer for highest interest rate vs. smallest debt that is right for everyone. Each person should take the amount of each debt with the corresponding interest rate and plug those numbers into a debt snowball calculator in varying order to see which way is most efficient.
I can tell you that my personal experience - with quite a lot of debt but fairly close interest rates - that the different over about 5 years was only 1 month either way that I ran it. Your mileage will vary depending on the amount, the various interest rates and the amount of time it takes to pay off.
The fact of the matter is that usually when people get to the point that they reach for Dave Ramsey, they haven't been particularly smart about money in the first place so breaking it down in a way that is just easiest to grasp makes sense.
Truth.
At the end of the day whether you are DR or not, I just applaud people who are trying very hard to pay their debts. |
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writermom1
Thrift Whisperer
PeaNut 114,407
November 2003
Posts: 22,401
Layouts: 66
Loc: At the intersection of Hooterville and Stars Hollow
| Posted: 1/30/2013 5:53:53 PM
Thanks writermom1. I had asked a few days/week ago about the new quicken ap. I did read that the budget feature is better. Does it work well with the dr envelope concept?
Ca angel
I'm sorry I can't answer that.
I like Quicken mobile because I can enter transactions on the fly and have them sync in real time.
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TalissaAmity
BucketHead
PeaNut 154,643
June 2004
Posts: 538
Layouts: 0
Loc: Melbourne Australia
| Posted: 1/30/2013 6:22:46 PM
The most efficient way to pay off debt is highest interest loans of non tax deductible debt first. Work your way through the different debt based on interest rate not the total amount of the loan. Tax deductible debt comes next.
It's a bit more simple here in Australia as only the interest on rental properties is tax deductible, the interest on our primary residence is not. The interest on our student loans is not tax deductible either but they seem to be much smaller than your ones in the USA.
This is what I learnt at Uni (an Economics degree majoring in Accounting).
I can see the psychological encouragement of paying off a smaller debt but it it is not the most efficient way to do it. If you feel better having 4 debts totaling $100,000 rather than 5 debts totaling $98,000 you probably aren't looking at the right thing. It is your total debt that is important not the number of debts.
I kind of don't really follow the "extra" theory besides for the psychological boost. If you have a set amount to service debt, paying off the small debt first doesn't free up any extra, it's all just reducing your total debt. Paying off higher interest rates first stops greater interest accruing and is the only method that provides any extra. | |
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Free~Bird
Honorary Bearcat!
PeaNut 104,551
September 2003
Posts: 10,004
Layouts: 3
Loc: Missouri
| Posted: 1/30/2013 6:28:30 PM
Actually, dave says, the IRS comes first no matter what.
please commence the arguing. |
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writermom1
Thrift Whisperer
PeaNut 114,407
November 2003
Posts: 22,401
Layouts: 66
Loc: At the intersection of Hooterville and Stars Hollow
| Posted: 1/30/2013 8:02:56 PM
At the end of the day we can all agree that there are a variety of ways.
As for DR. It works. Apparently for millions of people. It doesn't work the optimal way you or I might do it but if it gets them where they want or need to be its a close enough win for me.
Arguing methodology is like going to WW and telling the lifetime achievers that their weight loss is no good because they didn't do it our chosen way
Actually, dave says, the IRS comes first no matter what.
please commence the arguing.
Uh uh. I think it's going to be tough to come up with the Pro Screw the IRS contingent. |
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