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Is Paying Off Debt Smallest to Largest Ridiculous?

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smallest to largest

Over the last few months, I have spent time interviewing other financial bloggers to get a sense of the worst money advice they’ve ever received. This week’s advice is on a topic that has been debated for years. It’s pretty controversial in the personal finance space, but I’m up to the task of discussing it today. So, let’s get started.

Anne of Money Propeller and Unique Gifter fame told me that some of the worst advice she’s heard is that people should pay off their debts from smallest to largest. Now, this advice comes from the one and only Dave Ramsey, who has helped thousands of people get out of debt.

But when you’re attacking debt is this advice bogus or not?

In Favor of Smallest to Largest

 

Let’s think of why some people might want to pay off their debt from smallest to largest. Dave Ramsey asserts that paying off debt is mostly psychological, and I tend to agree with him.

Basically, if someone has a long list of debts, they gain momentum by starting small and gradually getting excited about that long list shrinking.

To them, it doesn’t matter that the math is in favor of paying off the highest interest rates first. They just want to say that they’ve paid off one card or one student loan and only have a few more to go. Paying off large debt amounts takes a lot of time, and people can quickly lose momentum. It gets too hard to pay off debt, and some people give in to debt fatigue and go shopping instead. Paying off debt from smallest to largest tends to minimize the chance of this happening, which is why so many people are in favor of it.

In Favor of Largest to Smallest

 

When you start paying off debt, you’re going to have to do some math. When you do the math, you’ll notice that you’ll save a ton of money if you start by paying off the loan that’s going to cost you the most over time. This often means paying off loans with the largest (or highest) interest rate first.

This is the way that I am personally tackling my debt. It just makes the most sense for me. I like to start with a big challenge and work my way through it in all aspects of my life. For example, when I clean, I start with the messiest room, so the rest of the process goes faster. When I have to change two diapers at once, I start with the kid who is screaming the loudest or smells the worst. 😉 So, why wouldn’t I start with the highest, meanest interest rate and get it out the way?

So, I agree with Anne that our good friend Dave Ramsey might not have the best advice in town. Others have disagreed though and have seen incredible success using his method of paying off debt from smallest to largest.

 

What do you think? Do you think paying debt from smallest to largest is some of the worst financial advice out there? What method works better with debt fatigue in your opinion?

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Catherine Alford is a professional public speaker and freelance writer who covers family, finance, and freedom. Check out her blog, BudgetBlonde, and her bio at CatherineAlford.com.

46 Comments

  • Basically, it’s all about self-knowledge! You need to understand yourself well enough to know which one you would find more motivational and satisfying.

    • Cat says:

      So true. This is prob the most accurate comment of them all!

    • I’m in total agreement with this. I needed some victory reinforcement early on and paid off my 3 smallest loans first. Then, with that momentum (and a better understanding of debt/how to get rid of it/how awesome life will be without it behind me) I was able to jump to my largest loan to start chipping away without losing motivation. Know thyself 🙂

  • I don’t think paying off the smallest to largest is bad advice, it just depends on your situation. We used this method to pay off $109K worth of debt. We were able to reduce our interest rates with credits to make this method the most effective for us. Paying down debt for over 40 years you need some victories along the way, attacking the smallest bills gives you that momentum.

  • Ben Luthi says:

    I think it’s really based on what’s best for you. Some people like the emotional victory of paying off one more debt faster.

    Personally, I do smaller debts first, but my highest interest rate is 4.5% so it’s not like I’m losing hundreds of dollars. If it were in the upper teens like a lot of people Dave Ramsey caters to, I’d definitely hit those high rates first, no question.

  • I also think paying off debt from smallest to largest is the best method to use. There’s that satisfaction that comes with a completely paid off dent and that motivates you even to work harder in paying off the remaining debts.

  • Money Beagle says:

    I think each person has to make their decision based on their wants and motivations. We only have two debts, a small student loan that, with no extra payments, would be paid off in about 4.5 years, and our mortgage, which will be paid off in 11.5 years. Even though the payment, balance, and interest rates are all lower, I would definitely choose to apply extra payments to the student loan if given the chance, just so we’re rid of it.

  • Mrs. 1500 says:

    I can understand why Dave Ramsey gives out this advice, and for people in large amounts of debt, having the small victory can be motivating. Trying to tackle a large debt, seeing it not go down month after month, can make the whole thing seem worthless. Someone above said you have to know yourself. That is great advice that can help you determine the best course of action.

  • For my own psychological well being, I’d go smallest to largest. It’s the best way to keep myself from not quitting. Because even though it may cost a little more over the long run in a comparison of successful payoff – if going largest to smallest results in me quitting, that’s a larger failure.

  • Kathy says:

    Either way works but for some people the psychological boost and motivation provided by the smallest to largest payoff might be best. Plus, another benefit is that as each small debt is paid off, the money dedicated to that payment now goes to the next debt in addition to what was already being paid as a minimum payment. That increases the speed with which each debt is repaid. I don’t see how that would happen if you are working a long time to pay off the highest first debt. Sometimes you have to set the math aside to make the outcome best for your situation.

  • We’ve been trying the “highest interest paid off first” way for two years, but it just didn’t work for us. Like Brian, we started with LARGE amounts of debt. We switched mid-December to the Dave Ramsey method, and it’s working, I think because we were just getting burnt out by spreading our payments out and not seeing concrete progress. I think, like C said, it’s all about knowing what works best for you.

  • Robin says:

    I think as long as you’re paying off your debt, no matter which method you choose, it the right way to go. Some people need the extra motivation that Dave’s method employs, so I think both methods are right.

  • Good post Cat and you have enticed me to write a follow up to this. Thanks for the fuel!

  • Eric says:

    I think you said it all with your first paragraph–paying off debt is psychological.

    Imagine if you had to lose 100 pounds, but you wouldn’t be given a scale until you dropped 80 pounds. How much progress do you think you’d make between 0 pounds lost and 80 pounds? Probably not very much, as it would be hard to stay motivated by seeing progress and seeing the fruits of your labor.

    In “The Prince,” Machiavelli said that we have to rule in the world as it is, not as we want it to be. If we could avoid psychology, then of course paying the high interest debt first makes sense. But, that’s not reality; we can never trump psychology. So, getting those small debt wins at the outset is the way to go.

    Eric

  • I think if you have never tried to get out of debt, paying the smallest amount off first is the way to start. You need that motivation to keep going.

    In our situation, we currently have four (gasp) mortgages. We are only putting extra toward the one on the house we live in, even though one of the rentals has a pretty low balance at this point. The interest rates are not high on any of them, so paying off our own house means more freedom, as long as other people keep paying off the other ones!

  • I think it’s always best to not focus on dollar amounts but instead focus on interest rates, but again, we are talking psychology here and not finance (regardless of whether most people admit it or not!). If your goal is to pay off all your debt, getting rid of the smaller balances is probably the best way. It’s totally psychological but it probably feels good enough to motivate you to pay off more and more.

  • Kalie says:

    Paying off debt smallest to largest, though perhaps not the most mathematical advice, could hardly be counted the worst financial finance. How about the cultural norm of staying in major debt most of your life? That’s the worst financial advice I’ve ever heard. Paying off debt faster than required by creditors is good advice, however you go about it.

  • Michelle says:

    I can see how paying debt off from smallest to biggest would create debt payoff motivation, but for me I went for the highest interest rates first! That was the better option for me, as I wanted to save the most money.

  • Jamie says:

    Honestly, I understand both sides. It just happened that starting with the small debts and then working my way up worked best for me. The momentum really made a difference and I’m doing better with my financial decisions now than I would’ve been.

  • Mrs. Maroon says:

    Being engineers, both Mr. Maroon and I thrive on numbers. From that perspective, I’d attack the highest interest rate. And perhaps the longest one since you get a bigger bang by chopping at the principal earlier in the term. I tend to be fairly un-emotional, so the psychology of paying off specific notes doesn’t necessarily apply best to me.

  • Agreed Cat. I personally pay those with the highest interest to stop incurring high interests first. But, I switch now and then because I also need to consider the “time” for both, what needs to be paid first.

  • I chose to pay off debt smallest to largest because it kept me motivated when one card was done and off to the next. Definitely works when you have small amount of debt spread across way too many credit cards.

  • I hate Dave Ramsey’s snowball method and show the math ALL the time to clients about just why it’s so bad. I get that you may mentally feel better, but there are other things you can do to mentally feel better while paying off debt rather than paying more interest because you like to get rid of smaller debts if you can.

  • I’m doing my own little hybrid plan. Part of it is based on size of the balance, so I can use that payment money to make my “snowball” larger more quickly. But part of it is also based on the super high interest rates I have on a few of my debts too. Great question!

  • Syed says:

    For the first year of paying off my student loans, I actually did start with the lowest balance because Dave Ramsey was one of the first finance books I’ve read. Then I saw how much I would save by paying the highest interest rate and quickly changed course. If you can look at the end of the road, paying the highest interest rate makes a whole lot of sense.

  • I would definitely pay off the highest interest debt first, but paying off the smallest balance first isn’t necessarily bad advice. It depends on the individuals involved and what works for and motivates them. Even if there’s a “best way” there can be more than one “right way”.

  • Michelle says:

    We have always used this method. It is the most rewarding for us, even if we are not paying off the highest interest first.

  • JMK says:

    Any method that works for you is the right way for you. Having said that, I’d venture to say that if you had the internal conviction to always do what’s logical, sensible, and mathematically advantageous then the debt problem wouldn’t exist. You’d have been spending less than you earn all along because that makes sense mathematically. The exception to this might be a new grad who ran up debt because they had no income, and if they were a conscientious student that studied hard and slogged it out for several years with their eyes on the end goal, then they are also likely good candidates for the highest rate logic. Maintaining fiscal restraint and motivation for the long term were never the problem, just lack of income.
    I admire anyone who takes on solving the problem regardless of how or why they got into the situation. As long as they were aware of both approaches and consciously chose the one as the best fit for their personality, it’s all good.

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