Discussion in 'Budget Board' started by luvmylittleboy2003, Jan 24, 2012.
Do you start with lowest balance or highest interest rate? I've read different things
We started with the highest (why give them anymore free money?) and snowballed from there.
personal decision, starting with the highest is usually recommended BUT if you have a balance somewhere that is quite low and could be paid off in a couple months, it is often good to start there, as then you can be happy about paying something off and move on to the higher interest rate. be sure to call your credit card company and banks to see what they can do to help you out, like lower your interest on your CC or reduce your monthly bank fees for a period.
This may just be a canadian thing, but I love Gail Voz Oxleys (sp?) approach to paying off debt. look up the show Till Debt do us Part http://www.slice.ca/Slice/Watch/Default.aspx?ID=v some very helpful tips. I follow her method of spending cash only and budgeting in jars.
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There are two schools of thought on this.
One is to start with smallest debts and concentrate on knocking that one off. Once that is paid off, you take the money that you were paying on it and add it to the minimum payment you were making on the second-lowest payment. And you keep that up until they are all paid off. It can be inspiring to be able to cross them off one by one. This can be especially motivating in the beginning.
The other school of thought is to put all your efforts into paying down the one with the highest interest first and then working your way through your debts that way. This would be the smartest way to go money-wise. You will pay less in interest costs this way.
I would try to consolidate them all using a balance transfer offer with a guaranteed low interest rate for the entire time that you owe the money. Don't do a balance transfer if the low rate is only for 6-12 months unless you know that you can pay it off before the promotional rate expires. The default interest rate will probably be higher than what you're paying now. It may seem daunting to see it all in one lump sum, but it will be one single payment each month and the interest would be low.
Good luck with whatever method you choose. There really is no wrong method as long as the end result means that you are debt-free.
I think it is best to pay off the lowest amount first, but I am not one who is a hard liner on this. Dave Ramsey strongly suggests starting this way.
The only debts we had when we started a DR type program were student loans and a car. Both were about the same amount of $$ owed and both were pretty low interest. So, there were no real decisions that needed to be made about it.
We followed the DR plan and are now debt free except for the house. It took about 18 months.
For us, it really wasn't about the interest rate. Each time something would be paid off, it made us feel good and encouraged us to keep going.
No matter what you choose, it's great that you are trying. Hang in there. It's worth it!
Most people will have the best long term results using this approach.
What we did was use our tax return money to first pump up our emergancy fund to $1000. Then we used the rest to pay off 2 smaller debts. From there on out we went from highest Payment, not neccessarily interest rate, down. At the time we were anticipating me losing part of my income, so things that were bigger payments like sons ortho bill ($95) and a medical bill ($178) were first on my list. As we kept going, we did take those amounts and put those on the next bill, vs putting more into savings, till everything was gone. Good luck to you, it can be daunting, but a plan will help!
Honestly, which approach you choose to take really depends on what your priorities are and how well you think you'll be able to stick with your repayment plan.
If you are very motivated and don't feel you'll need the feedback of paying off smaller debts periodically, paying down the highest interest rate debt first will save the most money long-term.
However, for most of us, we need positive reinforcement. We KNOW what we should do, but we do what feels good rather than what is right. The idea of paying of smaller debts first then rolling that payment into payment of the next smallest is usually refered to as snowballing, and once you get to the bigger debts you have a bigger snowball to throw at them. Paying off small debts more rapidly provides positive reinforcement which some find motivational.
It's all about finding what will work well for you, in my opinion. If you aren't worried that you'll have trouble sticking to the plan, pay off the high interest stuff first. If you have any doubt about your motivation level, do smaller debts first.
I think it is Dave Ramsey that says something about paying off debt not being about math, but behavior. We all understand how the math works and what will save us the most, but it's about changing behavior, and that can be hard!
We're doing it mostly by lowest balance, but not with a couple things. We want to pay all our credit cards off first so that has messed it up a little. Also paying stuff off by how it effects our credit. Also, paying the highest interest rate doesn't ALWAYS save money. If you can pay off a smaller debt in a few months, often adding that snowball money actually pays off the higher rate quicker. So make sure you crunch your numbers if you deviate.
We are also using our taxes money to really start our snowball and have decided we are paying off a bunch of small bills with that money and then we are tackling another loan, a car and a van before the house. The loan payment is not really high and the interest rate is not very high so we are going to pay the car off before it since it is a high interest rate and a huge payment a month we would love to be out from under then we will pay the other loan, van and house off. Using a debts app we have doing it this way we can be debt free in November 2018, if we pay smallest to largest it is March 2019 or paying highest interest rate down it is October 2018 so our way is not the "quickest" way but it all depends on your priorities!
When I was just starting on my debt journey I found this website useful in determining where to start.
Just put your information in and see how long each bill will take to pay off or how much you would need to pay if you want to pay the bill off within a time period.
Another feature it will tell you how much the added interest will cost for each bill.
Of course, one of the hardest parts of getting out of debt is to stop buying things you can't afford (like taking Disney vacations before the kids grow up too much).
But yes, assuming you have credit card debt, you should track how much total interest you are paying each month and try to lower that number as quickly as possible. Transferring a balance ... say $10,000, to a 0% for 15 months credit card at a 3% balance transfer fee costs you $300, but it most likely drops your total interest payment by over $1,000 over 15 months. But be sure the regular % interest on the new card is about the same or less, so after 15 months you are not losing ground again.
For the most part, we followed Dave ramsey's plan. We did not have much credit card debt so we were able to be debt free except our house in about 8 months. We have 3 vehicles all paid off also (also all at least 8 years old). Right now, we are working on stockpiling 1 years worth of expenses for our big emergency fund and then we are going to attack the balance on our mortgage. We are 37 and our plan is to be completely debt free, with a min of 1 year emergency fund, and a good size savings for vehicle by the time we are 42.....and it looks very doable from our current budgets. The main way we have deviated from daves plan is 1. We did not stop our retirement contributions during this process and 2 we understand that until we are millionaires (lol) our credit score is very important so while we will not get back into the credit circle, we do understand how important it is to maintain our excellent credit score.
Regardless of which method you choose, good luck! Your making the right choice in making sure your financial health is , well, healthy
Similar thing. Our lowest chunks of debt had no interest, and the next higher debt had the highest interest, and the last one is DVC (while many say the Disney loan is high interest at ~10%, our car loan was 25%), and we were spending more on paying for hotel rooms than we are on the loan, so....
If something happens and you cannot make those payments, how fast do they take the car? Do they take the car AND want more payments? How will it feel to have whatever happened to cause the no payments, AND to not have a car as well?
Even without *something* happening, what if you just can't get it together to pay it quickly? What if you still use whatever credit cards, or take more loans, or available credit, and create more debt? What happens if your car is totaled?
If you want HARD answers and GOOD questions, and generally really great advice, I would recommend gathering all the info on your debt (and expenses and income) and baring your financial soul on the livinglikenononeelse.com boards (Ramsey fans, basically). It might hurt, but if you listen, it will help immensely.
I get what you are saying about the 4 high-interest debts vs. the 1 lower-interest consolidation loan, but I would still be leery of using my car as collateral. Not saying its the wrong decision, but I would really, really think about how secure you are with making THAT payment every month, on time, before signing on that dotted line.
We managed to eliminate our debt years before we read our first budgeting book. Back then, we moved our debt from one 0% interest card to another until it was paid off. But, they usually had offers of 18-24 months. I haven't seen many of those lately.
Since then, we haven't had credit card debt, but we've had other issues crop up from time to time (medical debt/car trouble/employment cuts) that hit our budget hard. One thing I've discovered is that we almost always find quite a bit of free money within our budget when we really go looking for it.
We shut off our cable/internet for about two years which freed up $100/month toward debt. We've trimmed the fat from our phone service, saving $50 a month. We trimmed the grocery budget for another $50 a month. We looked for more work and ended up cleaning our church for $25 a week. It doesn't sound like much when you look at all those items individually, but when you put it all together we had FOUND $300 a month for the bills. And there were more areas to trim and cut when we started really looking. I won't bore you by listing them all.
If there is ANYTHING like this you could do, I would consider that before tying the debt to your car. At least when it's credit card debt you won't lose your car or house if something happens during the payoff period (like a lost job or major illness) and you lose the ability to make the payment at all.
All that being said...I do think cutting down the number of bills helps when you have a tight budget. It gives you a clear picture of what you have to pay and when. Having a multitude of bills to pay each month just gets confusing and difficult to track and makes late payments and other mistakes more likely to occur. (One reason I like Ramsey's method, it starts to eliminate those multiple payments quicker...)
Good Luck. I hope you find a solution that will work for you!
The part in bold kind of jumped out at me. If you're serious about paying down your debt, you will not "free up additional cash flow". You still have the same income, so the only thing that will change is the interest that you will be paying on the loan. To really pay down that debt quickly, you should continue to pay whatever amount you have been paying on all of your debts but it will only be the one payment (the consolidation loan) instead of several separate payments to the various creditors. IOW, that "lower monthly payment" is deceiving.
Your debt remains the same but you will add your car into the pot in order to get that loan. That means you will not have a free and clear title to the car. You can't sell it or trade it in without repaying the loan first. If the car is totaled in an accident, your insurance will pay off the loan before they give you a check to purchase another car. If you fail to make payments on the loan over a period of time, they can repo your car.
It's not a choice that I would make.
Sorry, but this is simply incorrect. Even if it's longer before you can do the snowball, then paying any discretionary funds towards a higher interest debt will always mean less interest and less out of pocket expenditure.
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