Ahh, the million dollar question. Literally, a million dollars for some of you! Before we dive in, we realize that everyone has different preferences, goals, and situations so this is more general guidance. Do what is best for you! But join us as we break down the three types of ways you can pay off your loans using a lunchbox analogy.
Debt avalanche method, AKA eat the worst-tasting items first.
We’re looking at the apples, bananas, celery, and raisins here. That stuff is nasty but if you finish those first, then at least you have all of the enjoyable items remaining. How does that translate to your loans?
This is called the debt avalanche method. You prioritize paying off the debt with the highest interest rate first, while still making minimum payments on other debts. This method saves the most money over time, as it minimizes the amount of interest paid.
But let’s admit it, starting off with raisins is disgusting so you need to have the endurance to know that the good stuff is on the horizon. Get these poisonous items out of your lunchbox as quickly as you can and you can focus better things, or lower interest debt.
Debt snowball method, AKA snacks first, sandwich last.
We’re all guilty of loving a good Goldfish session before eating our PB&J. The nice thing about eating all of your tiny snacks in your lunchbox is that very quickly you’ll be down to just one or two more items in your meal.
This is called the debt snowball method. You prioritize paying off the smallest debt first, regardless of interest rate. This method provides quick wins and helps build momentum and motivation for paying off debt, as debts are paid off faster and the number of debts decreases.
If you're looking for a quick win to help boost your motivation, it’s good to eat your small snacks first or pay off small debts first.
Pay off specific types of debt, AKA save your favorite food for last.
Some foods are just so special to us. The pizza slice. The Lunchable set. A hearty Capri-Sun. Saving those for last means you’ll be the happiest camper at the end of your meal.
This is prioritizing debt by type. Some debts accumulate interest more quickly than others, while some have more lenience. Credit card debt is especially aggressive in how interest accumulates and should be prioritized as it can quickly balloon out of control. Since auto loans and mortgages are tied to actual assets, those should also be a priority. But student loans might be able to come after these as your budget allows since there isn’t a way they can take your degree back away from you.
Your favorite food is so personal and subjective. There’s no golden rule for what type of debt should be paid off first so use your best judgment or just defer to the debt avalanche method or the debt snowball method.
Your lunchbox, your rules
Ultimately, the best type of debt to pay off first will depend on your individual circumstances and financial goals.
Peach out ✌️