Paying off debt: Targeting High Interest First

Most of us have taken debts in one form or the other – Student loans, credit cards, car loan, personal loans etc. When it comes to paying off debt there is always a debate on the best mode to pay off debt. Last month we talked about the Debt Snowball method and how it can keep one motivated to pay off debts by the quick wins of clearing off the smallest debts first.

This month we talk about the Debt Avalanche or the Highest Interest First method – With this method, you focus on your debts in order of their interest rate, making sure you pay off the highest one first. This route may help you save time and interest over your debt payoff journey.

This is the method in paying off debt that people find the most logical – as you’ll find yourself paying considerably less in interest fees than if you were to use the snowball method. You do need to make sure that you stay motivated to continue, even if it doesn’t feel like the debt is budging, and even if you think it’s too high to make any difference. If you tend to lose motivation quickly then you may need to cut your losses and try out the snowball method. Don’t force yourself to take this approach just because it works out the best for you financially – go with the approach that works for you and makes you feel comfortable.

Now, let’s get started.

Start, as with all of these methods, by listing your debt. Put them in order by interest rate, with the highest first. Don’t think too much about the amounts, just focus on the rate that it is accruing interest at. The plan is to get rid of your higher interest debts first, so they don’t have a chance to gain as much more interest than if you focused on them last – let’s say that this is your list:

  • Debt A: £870 18%
  • Debt B: £390 17%
  • Debt C: £5480 9%
  • Debt D: £250 7%

Now, as with the snowball method, all of these debts have a minimum amount you have to pay off each month – make sure these are set up as direct debits and these amounts are budgeted. If you haven’t done so yet – make sure you’ve worked out your budget . Once you have done this, as with the snowball method, pretend that none of your debts exist except the first one in your list. You’re not allowed to worry about the others until it is their time.

Now, that final figure we came to when budgeting, this is the amount that you’ll be paying off debt A each month, on top of the minimum payment for it. Try to make sure that you put as much money towards this as possible, without going into any more debt or taking out a necessity. If you manage to curb your coffee spending habit, for example, put the money that you would have spent on coffee towards your debt payments instead.

Once debt A is fully paid off, you move your payments to debt B. You’ll also continue paying the minimum payment for debt B (as it is budgeted) and you’ll also be able to put your minimum payment from debt A towards it, as debt A no longer exists and it’s in your budget. This sounds confusing, but once you get started, it’ll all start to make some sense.  The good part of this is that, if you had a relatively high minimum payment for your first debt, then you find that it frees up a lot of cash once it is paid off, which significantly helps towards motivating you.

Keep working like this, chipping away at one debt at a time until all of them have been paid off. You’ll find that the interest that you end up paying will be less than with the snowball method as you are targeting high interest debts first. Try not to feel discouraged if the first debt is a large one. It will take a long time to get through, but once it is paid off, the sense of achievement that you’ll feel will hopefully keep you going.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *