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Does paying off smallest debt first rather the one that has highest interest make sense?

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Old 14-10-2018, 09:43 AM   #1
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Does paying off smallest debt first rather the one that has highest interest make sense?

It’s a lazy Sunday and watching YouTube when I across this channel by “next level life” which explains Dave Remsey’s 7 baby steps. Pretty interesting:

https://youtu.be/ojaPUG4aM0Q

Couple of questions for discussion to see if you guys agree/disagree on Dave’s method of tackling debt:

Baby step 1: (save $1,000 in cash)
Qn: Is saving $1,000 FIRST a good idea despite having debts that carry heavy interest (E.g.: LMLs)

Baby step 2: (debt snowball, pay the smallest debt first).
Qn: Does it make sense to pay the smallest debt first despite having debts with higher interest just because by doing so, it gives hope and will for the debtor to fight on?

Feel free to leave comments on why u agree/disagree.

As there are many money management topics covered by this channel, u may want to also subscribe.

Disclaimer: I’m in no way associated with next level life.

Last edited by ELKYme; 14-10-2018 at 09:45 AM..
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Old 14-10-2018, 10:40 AM   #2
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Psychologically yes, financially no...

Depends on what you prefer...

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Old 14-10-2018, 10:57 AM   #3
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Think it’ll be real difficult to even follow step 1 if the creditor keeps knocking at debtor’s door.

Psychologically yes, financially no...

Depends on what you prefer...

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Old 14-10-2018, 01:53 PM   #4
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If you owe:
100k at 3% per month; and
20k at 10% per month.

Which would you try paying off first?
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Old 14-10-2018, 05:22 PM   #5
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I would just pay off whatever has higher interest
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Old 14-10-2018, 05:27 PM   #6
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I would just pay off whatever has higher interest
I agree. This makes better sense.
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Old 14-10-2018, 08:37 PM   #7
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Ordinarily you should pay off the highest cost debt first, where highest cost is measured including all costs: interest, fees, etc. Some high cost lenders have minimum monthly interest charges, for example, which inflate their "headline" interest rates.

There are some rare exceptions, for example if you're going to default. Then the optimal strategy can get a little "strange."
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Old 14-10-2018, 09:39 PM   #8
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Hi BBC,
Thanks for contributing to this thread.

Didn’t see you around whole day, went out? Had an enjoyable day?
Kinda boring the whole day here....except for the 5 million dollar thread.

Ordinarily you should pay off the highest cost debt first, where highest cost is measured including all costs: interest, fees, etc. Some high cost lenders have minimum monthly interest charges, for example, which inflate their "headline" interest rates.

There are some rare exceptions, for example if you're going to default. Then the optimal strategy can get a little "strange."
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Old 15-10-2018, 03:26 PM   #9
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If you owe:
100k at 3% per month; and
20k at 10% per month.

Which would you try paying off first?
1) Consolidate all your debts to the account that is of lower interest
2) if it is not possible to consolidate to 1 account, try to maximise the amount of loan on the lower interest account and pay off the higher interest account.
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Old 15-10-2018, 11:20 PM   #10
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Baby step 2: (debt snowball, pay the smallest debt first).
Qn: Does it make sense to pay the smallest debt first despite having debts with higher interest just because by doing so, it gives hope and will for the debtor to fight on?
Yeah, this is one of those things where psychology can be more important than the actual numbers. "I paid off my debt! I'm cutting up this credit card!" is a powerful motivator.

It's really a case of what works for you. Dave Ramsay's advice is targeted at people who are struggling under a hefty load of debt, and need a nudge to get started on paying it down. And in that case, you don't want to let the perfect be the enemy of the good.
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Old 16-10-2018, 07:25 AM   #11
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Yup, personally I agree with both baby steps 1&2. Just wanted some confirmation.

Came across this channel sharing about the debt snowball method a little late.
Recently, a young man came here asking for advice on clearing he’s debts (not much) and I was very insistent that he cleared he’s debts with licensed moneylenders first...WRONG. On hindsight, not the best advice (I’ll learn).

My Mistake:
1) For he’s situation, baby step 1 would have been ESSENTIAL for him as he’s from a single-parent family unit and the sole breadwinner has a irregular income. (More susceptible to emergencies).
2) Baby step 2 would be ideal as he indeed needs a “nudge to start paying off he’s debts. In addition, after analysing he’s situation, the LMLs doesn’t really have much leverage over him at all.

Well, we are all learning...

Yeah, this is one of those things where psychology can be more important than the actual numbers. "I paid off my debt! I'm cutting up this credit card!" is a powerful motivator.

It's really a case of what works for you. Dave Ramsay's advice is targeted at people who are struggling under a hefty load of debt, and need a nudge to get started on paying it down. And in that case, you don't want to let the perfect be the enemy of the good.
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Old 16-10-2018, 01:29 PM   #12
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if you are borrowing from ah long, pay off the small debt first means you have one ah long harassing you instead of two.
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Old 16-10-2018, 01:42 PM   #13
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Thank God, that young man borrowed from LMLs that has to abide by the rule of law and NOT Ah Longs.

If he had borrowed from Ah Longs, I would have advised him to sell he’s kidneys if needed in order to quickly clear that debt.

With Ah Longs, there are no rules and they can do whatever they want, similar to WWE extreme:
https://m.youtube.com/watch?v=c4Awc8najUk


if you are borrowing from ah long, pay off the small debt first means you have one ah long harassing you instead of two.
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