Which Debt to Clear First
The mathematically optimal order and the psychologically sustainable order are not always the same. Here is how to choose.
There are two defensible approaches to clearing multiple debts, and the argument between them is usually conducted as though only one can be correct.
Highest rate first
Directing every available shilling at the highest-interest balance minimises total interest paid. It is mathematically optimal and, for anyone with the discipline to sustain it, the right answer.
Smallest balance first
Clearing the smallest balance first costs more in interest but produces a completed debt sooner. For people who have previously abandoned repayment plans, that early completion is often what makes the difference between a plan that finishes and one that does not.
Choosing
If the interest-rate gap between your debts is wide, the mathematical cost of the second approach becomes hard to justify. If the rates are similar and your history suggests motivation is the binding constraint, take the psychological win.
The worst option is the one many people default to: paying a little extra on everything, finishing nothing, and losing confidence in the plan.
Topics
- Risk
- Emergency Fund
Written by
Amina Said
Financial Coach
- Accredited Financial Counsellor
This article is general information, not personalised investment advice. Please speak to an adviser about your own circumstances before acting on it.
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