Dave Ramsey has taught me a lot. I listen to a lot of his podcasts and have enjoyed reading his book, The Total Money Makeover. While I don’t follow every bit of advice he has to offer, I do appreciate and apply a lot of what he says to my own personal finances.
One of the things that Ramsey is often criticized for from a financial perspective is that he recommends you pay off your smallest balance debts first. Conventional wisdom would say that you should pay off your loan with the highest interest rate first, regardless of the size of the loan. Dollar for dollar, your most “expensive” money that you are borrowing is that with the highest interest rate.
Being an analytical thinker myself, it was hard to not dive headlong into paying off my highest-interest loan first. But I decided to take Ramsey’s advice, and I’ve been very glad that I did. My college loans are all managed under the same company, but there are nine separate loans at varying balances and interest rates. Early on in my debt repayment process, I chose to target the smallest balance first. It was a little under $1,000 and I was able to pay it off pretty quickly. I paid off a loan! An entire loan, never to be seen or heard from again! This was a morale booster and a psychological victory. And that is exactly the point.
Paying off the small balance debts may not technically be the best way to pay of debt, but paying off debt at all is hard. Really hard. You need every ounce of momentum you can get when you finally say “I’ve had it with these crappy loans!” Paying off debt is exhausting. You feel like there will always be another payment to make on another loan, without an end in sight. But knocking off small loans feels great and gives you the fight to keep on enduring the process.
Beyond that benefit, paying off smaller loans frees up money to pay towards other loans. Of my nine loans, I had spread my payments across all of them. Once I was down to eight, I could pay a little extra on one of those instead. Down to seven, six, well you get the idea. I am now down to only three of my nine total loans to pay off and it feels great! I can’t wait to be done with it.
Perhaps you are just starting out in your quest to vanquish all your debt to “paid off” status. If you have a credit card that has $200 just sitting there, just knock it out before moving onto anything else. Take care of all the little loans and debts first and you’ll feel better about the process, and things will be cleaner as well with fewer debts to pay on.
I’ve had a few people reach out to me as this blog is getting off the ground, and I would love to hear from you! Feel free to shoot me a note on Facebook or Instagram (@figuringoutfinances). I love hearing success stories of those that have made it through the process, and I love offering any help or advice I can to those that are in the process with me now. Do you have a friend or family member who is troubled by their loans or debt? Please share this blog or recommend my Instagram account to them. Thank you!