Which debts you should pay off first
Which debts you should pay off first
All debt is not equal.
To start, you’ll want to rank all of the debt you owe in order of interest rate — from highest to lowest interest rate charged. While you’ll always want to pay the minimum on your various debts, prioritize the debt with the highest interest rate in order to pay less over the life of your loans.
Once it’s paid off, move down your list and tackle the next debt with the highest interest rate.
Note that the alternative strategy is what financial expert Dave Ramsey named “the Debt Snowball”: paying the smallest debt first, regardless of interest, then rolling that money into paying off the nextbiggest debt and so on, so you completely pay debts as you go. The advantage here is more emotional than monetary — it feels good to cross a debt off the list, and for many people, that emotional boost keeps them going.
If the snowball works for you, go for it, but do keep in mind that paying highinterest debt first is cheaper in the long run.
If I have multiple debts, which ones should I pay off first?
DOLP your way out of debt. DOLP stands for “dead on last payment”. Meaning, pay it off and close that account. That way, we don’t have to think about it at all.
How?
Do we pay a little on all of them at once? Or should we concentrate on one card at a time? And if so, which one goes first?
- Make a list of all the current outstanding balances on each of the accounts
- Divide each balance by the minimum payment that particular account wants from you. The result is that account’s DOLP number.
- e.g.
- water purifier account $8K and minimum payment is $100. So, the dolp number for it is 8K/100 = 80.
- car loan account $25K and minimum payment is $500. So, the dolp number for it is 25K/500 = 50.
- Rank each account in the reverse order of the DOLP numbers. Lowest number first.
Account Outstanding balance Minimum balance per month DOLP number Ranking Loan in India $11000 $600 18.33 1 Car loan account $25000 $500 50 2 Water purifier account $8000 $100 80 3 - The most efficient order in which we should pay off the various balances is - the way the DOLP numbers get to zero fastest. The aim is to make the DOLP numbers for all for all of them zero.