by Adam Alexander
It takes forever to pay off debt if you only pay the minimum each month. Thank goodness they now have started showing you the year it would be paid off if you stick to the minimum payment! (I’m kidding I HATE that!) Anyway, If you owe $2,000 on 18% interest, it would take over 30 YEARS to pay it all off. Obviously that’s not the best strategy. So what IS the best way to pay off debt?
Most people say to focus on the loan with the highest interest rate, and pay that one off first. Which does make the most sense mathematically, but according to a recent study from The Motley Fool, the psychology of debt also matters.
Researchers looked at the accounts of 6,000 people over the course of three years. They found that focusing on one account DID help them pay down debt faster! However, the people who started by focusing on their smallest balances felt the greatest sense of progress and they were more motivated to KEEP paying off debt.
In other words, say they owed $500 on one card, and $5,000 on another. Paying off the $500 balance first was better for some people, even if the interest rate was lower, because they felt like they were actually getting somewhere and making progress.
Now, that doesn’t mean you should ignore interest rates and if you know you’ll stay motivated, then attacking the highest rate first IS the smartest way to do it.
If you’ve almost got a card down to zero, don’t be afraid to pay that one off either. Because it might encourage you to KEEP paying off your debt.