Quote:
Originally Posted by Orgazmo
I don't understand why paying off the smallest shit first makes sense (other than non-tangible "victories" of removing a bill from one's life). If the smallest shit has a tiny interest rate, why wouldn't one use the extra cash to chip away at the higher interest stuff?
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Good question sir. Lets say you the following. To keep it simple, this is without the effects of compounded interest.
Payments:
A. $100 a month on a $5000 total
B. $50 a month on $2000 total
C. $25 a month on $1000 total
D. $25 a month on $500 total
So you are paying $200 a month just to service your debts. In addition to that you have $100 a month in extra money to throw at paying down the debts.
If you spend the first four months throwing the extra $100 at the smallest debt, you will have it completely paid off, freeing up $25 in discretionary income, then you are only paying $175 a month to service your debts, allowing you to put $125 towards debt C.
You repeat this for each consecutively larger debt, the idea is that once you eliminate a debt, you apply its "minimum monthly payment" towards the next debt.
The idea here is to manage your debt by getting out of it, as opposed to the modern American tradition of managing your debt by paying just enough.