Screwy Snowball

Robin's 3 remaining debts are so close in amount that she's wondering if she should take interest rates into account on her debt snowball.

QUESTION: Robin got a $3,600 bonus. They are on Baby Step 2 and paying their debt snowball. They have 3 debts (a $2,970 student loan, a $4,750 Discover credit card bill and another college loan, this one for $6,700). Her husband is wondering about the interest rate being a factor in what gets paid first. They make $93,000 a year. Dave tells her not to worry, and tells her why.

ANSWER: Mathematically my advice of paying off debt smallest to largest is wrong, but it’s still the correct advice. You’ll have the Discover card paid off by October. The interest rate won’t matter that much when you add up actual dollars on the interest spent. If you were going to keep it 6 years, then we’d have something to talk about.

When you knock out the little debt, it gives a sense of completion and closure. Remember that personal finance is 80% behavior and only 20% head knowledge. Mathematically the advice I’m giving you is about $25 wrong, but you’ll get more than that by getting closure on your debts and staying on a plan. Knock that little loan out first.