Which Debt Should I Pay Off First?

Overwhelmed by debt and not sure how to make a plan to become debt free?

Need help choosing where to start? 

What if I could help you get EXCITED about paying off your debt?

For realsies.

Let’s be honest, debt sucks. Paying off debt should be a lot easier to figure out without feeling like you need a PHD in money management.

The good news is paying off debt is a lot easier with the right plan. 

Even knowing which debt should I pay off first is a big step in the right direction. 

And I have a proven plan to help you organize your debt and create real momentum to become debt free. It’s the same plan we used to pay off $100,000 of debt in 5 years.

And it’ll only take a few minutes to explain and set up.

You ready?

Things to Consider When Deciding Which Debt to Pay Off First

Debt can be paralyzing, but it doesn’t have to be.

Let’s look at the top priorities to consider when deciding which debt to pay off first.

Keep reading or watch the video if you like that better.

Interest Rates – How do Interest Rates Impact Debt Repayment?

Choosing the best debt to pay off first usually starts with the interest rate.

And all debt isn’t created equal.

If you’re looking at debt repayment from a math perspective, the debt with the highest interest rate is costing you the most money in the long run. 

Some people would argue to pay off the highest interest rate debt first for that reason – you’ll save money on interest.

Let’s look at a few common types of debt and the varying interest rates. Here’s a good resource to learn more about average interest rates for different types of debt.

Credit Cards

As of March 2020, credit cards had an average interest rate of 21%. That’s INSANELY high. And most credit cards offer such a low minimum payment that it adds years and possibly thousands of dollars.

If you have credit card debt with a high interest rate – usually ranging from 14-27% depending on your credit score – pay it off as fast as possible. Of course if you have a high credit score, you’ll likely qualify for an interest rate on the lower end, but 14% is still a pretty high interest rate.

When you line up your debts in the debt snowball spreadsheet template, you can choose to put your debts in ANY order you want. And there’s a good chance with credit cards, you’ll want to attack that debt first.

Student Loans

Interest rates on student loans vary widely, but most fall in around 5%. That’s honestly not bad. If I had a couple student loans and a credit card debt, I’d for sure go for the high interest rate credit card first.

Auto Loans

Car loans depend a lot on your credit score, but most interest rates for new cars hover between 3-6%. It’s pretty low and won’t cost you a ton extra over the course of the loan if you have a plan to pay off your debt. A high interest rate debt takes priority over most auto loans.

Mathematically paying off the debt with the highest interest rates makes sense and will save you money – especially if you have credit card debt. Get it gone ASAP!

But it’s not always what I would recommend – more on that when we compare the Debt Snowball and the Debt Avalanche in a minute.

However, if your debts are like ours were, our highest interest rate was also our highest amount owed – $33,000. It just didn’t make sense to try and pay that off first. We’d still be paying off our debt instead of being debt free back in 2017.

I actually used our debt snowball template to test out paying our highest interest rate debt off first, and it would’ve taken years longer. But our debts were all student loans at the time, so the interest rates were still pretty comparable.

Interest rates are important, but they’re not the only factor to consider when deciding which debt to pay off first.

Let’s keep reading.

Total Amount Owed – How does this Factor into Paying Off Debt?

I’m a huge fan of making progress and checking things off of my “to do” list. 

And I kind of view debt as a “to do” list in my financial priorities. The faster I can get through this to do list, the faster I can accomplish my other financial goals.

Like saving for retirement, building up our vacation fund, and buying a new house.

In terms of paying off debt, the easiest debt to payoff is probably the debt with the smallest total balance.

If I can pay off my smallest debt quickly, I can cross it off my list and move onto the next debt.

I’m a huge fan of this concept, and if you have a lot of debts with similar ranging interest rates, I’d HIGHLY recommend the debt snowball method of smallest debt first.

And if it’s only a couple thousand or less, you might be willing to cut expenses for a month or two just to pay it off faster!

And then you’re already feeling a sense of accomplishment and drive to pay off the NEXT debt!

There’s a lot of psychology and motivation built into the debt snowball strategy and why it works to pay off debt.

You’re more likely to be more productive when you FEEL more productive. And paying off a debt feels pretty damn good and helps increase motivation to keep going.

This is exactly what we did to start our debt free journey.

But if you have two debts that are close to the same amount, pay off the debt with the highest interest rate first.

Minimum Payments – How Much do You HAVE to Pay Every Month?

I look at minimum payments in two ways.

Number 1 – what is the minimum payment I owe for EACH debt every month. You need to know this so you’re constantly making progress on your debts. You’ve gotta at least pay the minimum.

Number 2 – when you add ALL of your minimum payments up, what is the TOTAL minimum payment of all your debts combined?

It’s important to know the total amount you pay every month on your combined debt. When we were in the trenches paying off debt, our total was $922 every month.

I hated it.

Knowing our total minimum debt payment helped us maintain our budget and secure at least that amount. 

It was motivating knowing that one day soon, that $922 would be part of our budget and we could use it for something WAY MORE FUN!

What Motivates You? Math or Progress?

It’s so important to understand how your own brain and psychology work when you’re paying off debt, and especially when you’re choosing which debt to pay off first.

This leads me into the Debt Snowball vs Debt Avalanche debate.

There are so many opinions on which method is the best for paying off debt. My honest opinion is that it depends on your unique situation. 

Here are the basic principles of both methods to pay off debt. Hopefully this will help you decide which method to use and which debt to pay off first. There’s a more in depth description of each method in the next section

If you still can’t decide, I have a video series that you can explore to help you make the decision that works best for you. The video series is only available in the Debt Free Playbook.

The Debt Avalanche Method of Paying Off Debt – Highest Interest Rate First

If you like math and are very analytical, you’ll probably prefer the debt avalanche to choose which debt to pay off first.

Debt avalanche says to pay off the debt with the highest interest rate first because mathematically it will cost you more money over the terms of the loan.

The debt avalanche is perfect if you have a lot of credit card debt. It will give you a plan to pay off the debt that’s costing you the most money.

If you think the debt avalanche will work in your situation, GO FOR IT! 

Download my debt snowball template right here, and just arrange your debts in order from highest interest rate to lowest. 

Like I mentioned, this didn’t work for us because our highest interest was $33,000.

So we tried something else.

The Debt Snowball Method – Pay Off the Lowest Amount Loan First

I honestly prefer the debt snowball method and it’s what we used to become debt free.

When you pay off your smallest loan first, you can cross it off your list faster and move onto the next smallest debt. 

It creates motivation and belief in the system. This motivation helps you exert more energy to pay off your debt.

And for both the debt avalanche and debt snowball, once you pay off a debt, you add that minimum payment to your NEXT debt. This increases the minimum payment for it and allows you to pay it off faster.

The principle is, you already budgeted for your TOTAL amount of monthly debt, so you should be able to keep using it to accelerate your debt repayment.

Two Tools to Help You Choose Which Debt to Pay Off First (and become debt free)

My favorite tool to organize and pay off your debt is a spreadsheet.

I made a debt snowball spreadsheet to help us pay off $100,000 of debt in 5 years. It was incredibly motivating to see a real plan to become debt free.

And the good news?

You can use my free template to set up a debt snowball or a debt avalanche. You’ll just have to put your debts in the desired order.

And if you’re a complete spreadsheet nerd like me, you can rearrange your debts until you find the FASTEST order to become debt free.

This is an example of our debt snowball spreadsheet.

For the vast majority of people, paying off your smallest loan first will create a system that motivates you to be successful in paying off ALL of your debt.

Start Your Debt Snowball Spreadsheet Today

For a full guide on how to create a debt snowball spreadsheet today, just click here for set up guide I made. It’s helped over 1,000 people set up their own debt snowball spreadsheets.

It also has a link to download the free debt snowball spreadsheet template.

I also understand that for some people the debt avalanche will work better and help you save money in interest. 

The truth is, there isn’t a right or a wrong way to set up your debt repayment spreadsheet – debt snowball or debt avalanche.

My advice is to use my debt snowball template and test out EVERY order of debt repayment to see which one is the fastest for your unique situation.

That’s what I did. 

And I loved KNOWING which debt to pay off first instead of guessing and hoping for the best.

Use the Debt Free Playbook for a More Guided Debt Snowball Setup

If you want a MORE guided approach to setting up your debt snowball spreadsheet and finding the best order to pay off your debts, you can buy the Debt Free Playbook instead of trying to figure it out on your own with a free download.

It comes with a video tutorial to set up your debt snowball spreadsheet (or debt avalanche) in 20 minutes.

Plus…

It contains a bonus video to help you find the best order to pay off all of your debts, and shows you how many years you can save by increasing your minimum payment by only $20.

It’s definitely worth the $47 investment to get this short video course. Even if only ONE strategy helps you get out of debt faster, it could save you hundreds or thousands of dollars in interest. That’s a worthwhile investment.

You can make your debt snowball spreadsheet with zero spreadsheet experience as my videos walk you through every step and help answer questions that will inevitably pop up as you’re paying off your debts.

Grab the Debt Free Playbook here.

Are You Ready to Become Debt Free?

Debt can be overwhelming, but with the right plan, you can choose which debt to pay off first and take control of your debt repayment like never before.

Use the debt snowball spreadsheet (or debt avalanche) to help you create and stick to your debt free plan.

And if you need a little extra help with the setup, grab the Debt Free Playbook for just $47. It’ll be worth it.

Now go set up your debt snowball spreadsheet and implement your plan to become debt free. Once you have your “debt free date”, get to work making it a reality! You got this!

If you haven’t yet, go read the article of how to set up your debt snowball spreadsheet. You’ll be glad you did.

Our budget and goals changed our lives and it can change yours too.