How Do We Decide What Debts to Pay Off First?

Erik and his wife have $36,000 in debt. They make $90,000 a year. Most of it is medical bills, and they have a $5,000 student loan. The medical bills are accruing interest. Should they still pay those last?

QUESTION: Erik in Colorado Springs just got married. He and his wife are attacking their debts, and they have $36,000 in debt. They make $90,000 a year. Most of it is medical bills, and they have a $5,000 student loan. The medical bills are accruing interest. Should they still pay those last?

ANSWER: It doesn’t really matter because you’re going to be done with this in a year. The number of dollars of interest we’re talking about is going to be very small.

Think about this: If it were 10% interest, and this is nowhere near that high, on a $36,000 debt would be $3,600. Given the year-long timeline you’re talking about, the interest on the whole deal is only about $900 or less. Changing it around might make a $100 difference, but not much difference.

The big deal here is your attitude. You’ve decided that you’re done with this and you’re cleaning this mess up. You’re getting in attack mode. That is your secret sauce, man. You’re in good shape and you’re heading the right way.

If you have a medical bill that you can knock out and it will keep you out of court, that’d be a good thing to do. That’s a different matter than the interest. If they went to court and you’re already set up on a payment plan, then I wouldn’t worry about it. I’d treat it just like it’s a payment plan and work your debt snowball straight down.

But if you can knock some $1,000 or $2,000 bill out and stay out of a garnishment or court, I would break the rule for that. But if it’s just based on interest, I wouldn’t break the rule.

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