When you speak with a financial advisor about your debt, most will recommend that it be paid off in a specific order: the highest interest rate to lowest interest rate. This obviously makes sense, as the debt which you are paying back the most on will be gone as quickly as possible. Assume you are in the following debt:

• Student loan of $15 000 at 6% interest
• Credit card debt of $9 000 at 19% interest
• Line of credit with a $2 000 balance at 11% interest
• Car loan of $6 000 at 5% interest.

Yes, you would be saving the most money by paying the credit card, then the line of credit, then the student loan and finally the car loan. This system works wonders with the people who have the self-discipline to stick to such a system and eliminates the debt as quickly as possible.

However, a large number of people don’t have the self-discipline to pay off this debt in this manner simply due to the fact that when you’re paying off a large debt, it looks like you’re making virtually no progress. The credit card debt in the above example is the debt at the highest interest rate, which would be best to pay off first, mathematically.

However, when you look at the numbers, $9 000 and $7 000 are still two enormous numbers. Psychologically, paying off the credit cards first is the most difficult as progress is much more difficult to physically get a grasp of.

This is when the system recommended by Dave Ramsey in the book The Total Money Makeover comes in: he recommends organizing the debt, not according to interest rate but according to total balance:

• $2 000 line of credit at 11%
• $6 000 car loan at 5%
• $9 000 credit card debt at 19%
• $15 000 student loan at 6%

Dave’s recommendation is to pay the minimum payments on all of the debts, but to put every extra dollar you can gather towards the smallest debt, the line of credit. Once the line of credit is paid off, move onto the car loan. Mentally, you’ll feel as though you’re making much more progress than you would if you were paying the credit card debt off first. This method of debt elimination is known as the snowball method.

You will end up paying more interest if you do this method as opposed to the traditional method to eliminate your debt. However, if you’re the type of person who is likely to give up paying your debt entirely if you can’t physically see results, this is definitely a better option. You may pay slightly more, but you will end up paying off your debt entirely, which is the end goal.

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