We’ve all heard the conventional wisdom of every financial expert out there. They’ll tell you to pay off the debt with the highest interest rate first and work your way down the list. Some financial gurus may also suggest paying off your debt starting with the smallest balance and then applying that money toward your next debt (lovingly referred to as the snowball method). The idea behind the snowball method is that you’ll feel “good” about all the progress you’re making while working your way to a debt-free existence. For better or worse, both methods of debt repayment are effective, you’ll save money by tackling the debt with the highest interest rate and will probably feel positive about paying off smaller balances first.
Ditch Conventional Wisdom and Keep Your Lattes
The problem is, you’re not in this for moral victories or to save money on interest, per say. You want to increase your cash flow…amiright? If I am, then you’ll need to tackle debt according to how much cash flow you need to address any upcoming bills or other major milestones in life.
Here’s an example of how this plan would work:
You’re set to start paying back your student loan in six months, but you have credit debt, a car loan, and medical bills. List how much your student loan payment will be each month. Then, list all the debt payments you have by monthly payments – ignore interest and other extraneous details for now.
Goal — Have money for student loan payment – $250
Existing monthly debt:
Credit Card #1 – $190
Credit Card #2 – $400
Car Payment – $250
Medical Bills – $250
This example shows that there are two bills that you could eliminate to start paying off your student loan payment. Odds are, your car payment is thousands of dollars and if you had that type of money you wouldn’t be reading this. The best debt to tackle is the medical bill. Medical bills are almost always interest-free and the monthly payment always seems ridiculously high for the balance you actually owe. Take your entire balance owed and divide that number by six (represents the six months you have until student loan payments start) and that’s the amount you’ll need to pay each month until the debt is paid off.
Follow this plan and you’ll have the cash flow to address your immediate financial needs and will be able to focus on other long-term debt repayment goals.