Wondering what debt to pay off first? Once you’re ready to go beyond just paying minimum payments on each one, typical reactions are to either try to pay just a little bit more than the minimum to all of your creditors, or to try to decide which way will save you the most money.
In other words, we try to figure out what debt to pay off first based on logic. Unfortunately, that can be complicated, unless you owe the IRS. (In that case, they should probably top your list.)
Worse, trying to figure out what debt to pay off first based on logic isn’t necessarily effective, because borrowing money is rarely logical.
So instead, think about two things in making your decision about what debt to pay off first:
- Which debt would be easiest to pay off first?
- Which debt would you feel happiest about seeing gone?
Easiest is going to be the one with the smallest balance, simply because there’s less of it. So put your debts in order from smallest to largest and get rid of the first one as fast as you can. This is the traditional, Dave Ramsey-esque approach to paying off debt. And it’s very effective, because people are motivated by feelings.They feel great when they get rid of that first one, and so they keep going!
Logic really doesn’t play into it.
Don’t believe me?
Think about how you got into debt in the first place. Chances are, it’s because you wanted things, and didn’t want to wait until you had the money to pay for it.
Your pet got sick and required expensive medical treatment, so you paid for because you love your pet.
You “needed” a new car, right now, even though your old one could have been repaired for a few hundred dollars.
You wanted to go out to eat with your friends, when you didn’t get paid for another two weeks.
You hated having company over because they’d see your mismatched furniture or empty rooms in your house — the house you bought before you were financially ready, because “everyone” was buying a house at your age.
Not true needs
Most of those probably felt like needs, but realistically they were not. (Rationalizing something away doesn’t mean it’s actually true. It just means you’ve made your brain align with what you wanted emotionally.)
If you had been logical, you wouldn’t have gotten a pet you couldn’t truly afford to care for in the first place. You would have fixed the car, stayed home from dinner because you didn’t have the money, shut the door to the empty room or not cared what your friends thought, and rented until you were really ready to buy. Instead, you borrowed money and agreed to pay extra for the privilege.
But, what about….
The second question about which debt you would feel happiest about seeing gone comes into play if there’s a particular debt that’s really weighing on you emotionally. Maybe you owe your parents $1000, and every time you see them you feel like crap. In fact, you go out of your way not to see them any more, and it’s ruining your relationship. If you’re sick at heart over a particular debt, consider putting that at the top of the list when it comes to what debt to pay off first. Just be sure your feelings are strong enough to carry you through to completion.
Remember, a huge part of how to get out of debt is changing your behavior for good. And your behavior starts with your emotions.