Since we’ve been on our debt-free journey, I’ve been asked 1000’s of times why I chose to pay the smallest debt before the highest interest rate.
It’s really very simple- the momentum and confidence that is gained by knocking off those smaller balances first is worth way more than the small amount you will save paying the highest interest rates first. Here’s why:
Now let’s compare the two methods.
Below is a comparison of the small amount of money you could save by paying the highest interest rate first.
First lets looks at paying the smallest balance first. In the pic below, the strategy selected is Snowball (Lowest Balance First)and the interest paid is $4981.46
Now let’s run an Avalanche (Highest Interest First) scenario…interest paid is $4342.03:
As you can see paying the higher interest rate balances first only saves you $549.43 in a 46 month period….That’s almost 4 freakin years!! And some of those balances in this example carry very highest interest rates. It’s just not worth it. Can it be done? Yes, but just not worth it.
I hope this provides some clarity of why the “highest interest rate first theory” is mathematically correct but doesn’t take in account the psychological benefits off winning early by paying off those smaller balances .
Click here to download this Excel-based debt calculator.