Is it better to pay off high % or high balance first (mortgage, savings)
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You obliviously do not work with clients who are in debt and need a path out. Your comments are condescending to those whom you consider “are not as smart” as you and who may have acquired the debt due to illness, death, lose of job, divorce or other “out of their control” circumstance. Not everyone is stupid, lacks self control or has a recession free job, a wealth family or other support structure. Please focus your comments on areas where you may have some knowledge. Real life debt reduction is clearly not in this category.
The fastest and cheapest (saving money by not paying interest) is to pay the highest interest rate debt first. This is a mathematical fact, and to say so is NOT condescending or demeaning to say so.
The topic of this thread is the question "Is it better to pay off high % or high balance first", and it is best to pay high interest rate debt first, and the math supports that statement.
There are many reasons people are in debt, but the path out is the same, a plan which started with paying highest interest debt off first.
It is basic math, not rocket science, the highest interest rates cost you the most, and are eating you alive, so those are the ones to pay off first, regardless of the balance.
Quote:
Originally Posted by Asheville Native
The fastest and cheapest (saving money by not paying interest) is to pay the highest interest rate debt first. This is a mathematical fact, and to say so is NOT condescending or demeaning to say so.
The topic of this thread is the question "Is it better to pay off high % or high balance first", and it is best to pay high interest rate debt first, and the math supports that statement.
There are many reasons people are in debt, but the path out is the same, a plan which started with paying highest interest debt off first.
The math is only simple if you neglect to take the variables into account...
Income level and stability are independent variables
Minimum payment as a percentage of each debt is a variable
Each interest rate is a variable, as is the volatility of that rate
Trends in LIBOR or other benchmarks are variables
Banks' lending practices are a variable
The order in which the debts are paid is a variable
Hidden (seemingly non-tangible) costs for particular debts is a variable
Increased cash flow from paying off small debts first is a variable
To me, it looks like the optimal way to design a payout plan for the OP would be to use statistics to determine which debts would be most likely to turn around and bite them, and then use calculus to determine the areas under the debt versus time curves to create a master curve for each payoff scenario. In reality that won't happen, so the OP just needs to use their best judgement and beware of natives bearing facts.
Consider this scenario:
Let's assume I have an extra $1000 a month to pay off bills, and $3000 on a 0% CC teaser rate that will reset to 24% in three months. I also have a $3000 student loan at 6%.
Following the advice Ashville Native claims as a "fact", I would put that $1000/month toward the student loan to save the 6% interest. In three months, however, I'll get nailed with a 24% rate on the remaining $3000.
Here's the numbers doing it Ashville's way:
Month 1 - $15
Month 2 - $10
Month 3 - $5
Month 4 - $60
Month 5 - $40
Month 6 - $20
Total - $150 in interest paid
If I reject the "fact", and use a little common sense to pay off the teaser rate first, the numbers are a little different:
The math is only simple if you neglect to take the variables into account...
Income level and stability are independent variables
Minimum payment as a percentage of each debt is a variable
Each interest rate is a variable, as is the volatility of that rate
Trends in LIBOR or other benchmarks are variables
Banks' lending practices are a variable
The order in which the debts are paid is a variable
Hidden (seemingly non-tangible) costs for particular debts is a variable
Increased cash flow from paying off small debts first is a variable
We all assumed that the OP has fixed interest rates. Meaning none of them is a teaser rate. Also OP has extra income that he will be putting towards debt every month. Not just a one time payment. Every month he should pay the minimum towards all cards and the extra to the highest interest rate for that month.
We all assumed that the OP has fixed interest rates. Meaning none of them is a teaser rate.
Assuming is a quick way to get into trouble.
Even if you don't have a teaser rate, it's a good idea to consider paying off the variable rates linked to LIBOR, etc. before attacking a fixed rate that might be a little higher.
Interest rates everywhere are at an almost all time low, and they can't stay here forever. When they do adjust back up to normal (or higher than normal) levels, they could do so very quickly. All I'm trying to say here is that one rule can't cover all situations, and you have to use a little common sense to go along with it.
It's good to pay off the higher interest rates first, but you have to balance that against the potential downsides from adjustable rates and the safety of extra cash flow and increased motivation from paying off the lower balances first.
The OP didnt mention how much he has available to pay down the debts. If its an extra $1000 a month, then I'd pay them in the order he listed. He may be able to knock the first 2 off before the others raise the interest.
I would go after number 1. Pay it off. If any of the other cards is a bank credit card - this won't work on Master Card or Sears - use the payment amount you would be paying on #1, as a principle ONLY payment on the bank card. You need to be able to walk into your bank and do this in person.
That card will be paid off quickly. They use the amount from #1 and the bank -> to make payments every 15 days to the next largest balance - because it gnaws on the principle while one large payment does not. You will reduce the time it takes to pay off the balance.
In the meantime it would be good for you to get a handful of debit cards and leave the credit cards alone for a while. .
Let's assume I have an extra $1000 a month to pay off bills, and $3000 on a 0% CC teaser rate that will reset to 24% in three months. I also have a $3000 student loan at 6%
that is a BS scenario you dreamed up to prove your point. How long did it take you to dream that one up?
(I guess it won't matter much when the interest of the bottom 3 go up to 27% will it?)
If the bottom 3 go to 27%, I would probably still suggest the order you listed them in, but I'd also consider cancelling a few of these cards as they get paid off.
If the bottom 3 go to 27%, I would probably still suggest the order you listed them in, but I'd also consider cancelling a few of these cards as they get paid off.
I don't mean to be rude, but it drives me absolutely crazy that someone would give bad advice like this.
First of all, it makes no sense to pay them in any other order than the order of interest rate (highest first). And you offer no reason to go against what makes the most sense financially.
Second of all, canceling the cards will hurt your credit score. Simply don't use them. And the rate on the bottom 3 shouldn't go up unless you stop paying the minimum balance on each card.
To the OP:
Please go to this website, enter your cards' balance/interest/minimum payment and it will tell you the order to pay and when you'll have the cards paid off. Calculators - Debt reduction planner
I don't know what your minimum payment on each card is or how much extra you have to put toward you debt each month.
But let's say the minimum payment on each of the six cards is $50. And you have an extra $100 to put toward your debt each month. That means you'll be putting $400 toward the debt each month. Here's the results for that scenario:
If you pay $400.00 a month, it will take you 7 years and 10 months to pay off your credit cards. • Based on your current combined balance of $26,610.00, you will pay a total of $10,754.45 in interest.
And it shows you the order to pay and when each card will be paid off (I'd paste it here but the formatting is funky)
Hearing 7 years and 10 months depresses me and it isnt even my debt. Let's hope you have more than $400.
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