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Which debt to pay off first

post #1 of 8
Thread Starter 

Hi,

I know we don't want to follow the Dave Ramsey method because it wouldn't make sense for us. The smallest debts are not costing us the most in interest each month, so I want to pay off the higher interest debts first. My question is, which should I pay off- the highest percentage rate, or the debt with the highest interest charge each month? 

 

debt #1:  $6,400 - 11.25% interest (about $74 in interest a month right now)

debt #2:  $13,500 - 1% interest (about $135 in interest a month)

 

I've been paying more money towards debt #1, and I'm wondering if this is a mistake since it's not costing the most each month?  Any help would be appreciated! Thanks :)

post #2 of 8

Honestly the reason that the Dave Ramsey method recommends paying the lowest balance first is in both to give you a psychological boost as you see debt drop and to simplify your debt so that it's easier to allocate your money to few debts quicker. You are correct that paying the highest interest rate card down first will save you the most money in the long run.

 

As long as you are getting things paid off the order is really not as important as people think.

 

If  you want to pay of the higest interst rate first you need to go by the anual interest rate. So debt #2 that you have listed as a 1% interest rate actually has a 12%  APR if you are paying 1% per month. Does that make sense? So in order to pay the highest interest rate first you would make sure you have all your debt listed with the Annual interest rate and pay the highest annual interest rate card more each month to eliminate it quickest. Which would mean that you would pay the debt with the 12% APR before the debt with the 11.25% APR.


Edited by JollyGG - 6/7/12 at 11:53am
post #3 of 8

ITA with the previous poster: Your second debt has a 12% APR, not 1%.  Her assessment of Dave Ramsey is also spot on.

 

Dave Ramsey's plan is not about *saving money* but about success.  It is specificallly aimed at people who have had problems in the past paying off debt.  If you have the willpower to pay debts off in order of interest rate that is the best *financial* choice, but Dave Ramsey's method is more psychologically satisfying to many people.

 

Good luck!

post #4 of 8

I'd also continue to pay off debt #1 first.

post #5 of 8

It looks like your interest rates are pretty similar, so it doesn't really matter. I would pay extra on the one with the fewest payments remaining, so you can more quickly snowball that payment into the other debt.

post #6 of 8
Thread Starter 

Hi, thank you both. You guys are right. I'm 29 wks pregnant today and the way it's affecting my math skills, my vocabulary, my memory is just crazy.

 

I realize the psychological reasons behind Dave Ramsey's method, but I don't think we need to pay extra interest for that motivation- paying it off sooner and for less money is plenty motivation for me :)

post #7 of 8
Thread Starter 

Unless I am doing more crazy pregnant brain math- I just figured out, using my spreadsheet, that paying the 12% one off first, while making payments on the other one, will get us out of debt 2 months sooner and for about $128 less.  Which puts us out of debt completely around October 2013. Let's just hope nothing expensive comes up and we can keep that goal!

post #8 of 8
Quote:
Originally Posted by SomethingAnonymous View Post

Unless I am doing more crazy pregnant brain math- I just figured out, using my spreadsheet, that paying the 12% one off first, while making payments on the other one, will get us out of debt 2 months sooner and for about $128 less.  Which puts us out of debt completely around October 2013. Let's just hope nothing expensive comes up and we can keep that goal!

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