Video Transcript
Hey, Tammy here.
Today I want to talk about THE best way to pay off debt. Let’s say you’re ready to get out of debt. You’re pumped! You’re excited! You’ve reached your “I’ve had it moment. I’m sick and tired of being in debt. I am going to get out of debt!”. What is the best way to do that? There’s two ways you could approach it;
One is you list all your debts from your highest interest rate to your lowest interest rate and you pay them off in that order. You pay your highest interest rate one and when that is paid off you pay the next highest interest rate and on and on and on.
The other way is you list your debts from smallest to largest and you pay your smallest debt first, then when that’s paid off you go to the next smallest and on and on and on.
Between those two which way is the best way?? Well it turns out the best way to pay off your debt is to list them smallest to largest. Why is that? Because if you do it in that order you’ll very quickly see success by paying off those smaller ones first, which will give you the motivation and determination that you need to make it through that whole list. Because it could take quite a while (depending on how much debt you have) to finally pay off all those debts. Whereas if you start with your highest interest rate debt… and especially if the highest interest rate debt is one of your larger debts… it could take a long time to get that first debt paid off and to feel that success of “We’re doing this, we’re succeeding” and then also all the smaller ones will just kind of sit there, reminding you of how much more you have left to go. So THE best way is to pay off smallest to largest.
Well your next thing might be “Well Tammy that doesn’t make sense, because if I pay my highest interest rate one first I’m going to save the most money right? Right?” Well, yes theoretically and mathematically it may work out that paying your highest interest rate one could save you more money, but if you give up and get de-motivated well then guess what? You’re not going to get ahead. Whereas paying the smaller ones, and if that motivates you and if that keeps you going, that’s ultimately what’s going to save you the most money. It’s that behaviour change of having success at paying off your debt, is what will keep you going. So that’s why the best way is smallest to largest.
Okay, just a quick tip because if you remember the first step was “list all your debts” but what if you’re not even quite sure what all your debts are? Well do your best to figure out what you can and then “the tip” is to pull a free copy of your credit report. And that may list some debts that you didn’t even know that you had.
Okay, your action step for this video is to list all your debts from smallest to largest. Get a piece of paper and a pen, or maybe you’d rather do that in a spreadsheet, how you do it doesn’t matter. But just the act of writing these all down and looking at them and acknowledging it is huge. And then list them from smallest to largest and start endeavoring to pay them all off. And a great way to do that is through a thing called the “debt snowball” which will be a topic for a different video because it can get more involved. But if you have any questions about how to do this, how to list your debts, how to figure out what they are. Or if you have any questions or comments then please leave a question or comment. Or feel free to get in touch with me. And good luck with paying off your debt!