Which Debt Should I Pay Off First?

Committing to a debt payoff journey is a big step toward a better financial life. Want to know how to turbo-charge your progress? Choose one debt to pay off first, while making the minimum payment on the others. That lets you focus all your attention in one place, so you can more easily reach your goal. 

But how do you prioritize which debt to pay off first? We’ll cover two main ways you can create a personal plan for your debt payoff goals. 

Why Prioritize Your Debt Repayment? 

Prioritize which debts to pay off first so you can:

• Stay motivated

• Feel a sense of control over your finances

• Pay less money in interest

• Build healthy financial habits

• Boost your chances of success

• Plan to get out of debt sooner

Think of it like herding cats. It’s hard to make any progress with each one going in a different direction. If you can focus on one debt at a time, you could reach your goal much faster.

How Do You Decide Which Debt to Focus On First?

Most people choose one of two debt payoff strategies, focusing on either the debt with the highest interest rate or the debt with the lowest balance. If you pay off the highest-rate debt first, you usually pay less interest over the long run, and get out of debt a bit sooner. But some people prefer to get rid of the easiest debt first, and that’s usually the one with the smallest balance. 

Everyone’s debt situation is unique. You might prefer to pay off your debts in a different order. At the end of the day, it’s entirely your choice. 

Here are some important things to consider when you’re prioritizing which debt to pay off first:

• Balance: Smaller debts are easier to pay off than larger debts.

• Interest rate: If you pay off higher-interest debts first, like credit card debt, you could pay less interest overall—and that leaves more money to pay off other debts. 

• Payment amount: Some people prefer to focus on the debt with the largest monthly payment. Once that’s gone, it’s easier to make ends meet each month or pay down other debt. 

• Payment support: Some debts, like federal student loans, have benefits that make them easier to manage over the long run. That’s why some people prioritize getting rid of debts which don’t offer that type of support.

• Secured vs. unsecured: You might want to pay off secured debts first to ease your anxiety about losing an asset. (For instance, if you default on your car loan, you could lose your car. Once it’s paid off, you don’t have to worry about it getting repossessed.) 

Debt Repayment Strategies

Now that we’ve covered factors people look at when deciding which debt to pay off first, let’s look at the payoff strategies you can use:

• Debt snowball method: Pay off the lowest-balance debt first, to get to your first debt payoff fastest and build momentum.

• Debt avalanche method: Pay off the highest-interest-rate debt first, to reduce interest charges over time and potentially get out of debt even sooner.

• Hybrid approach: Create a custom debt payoff order based on factors that are important to you, like getting rid of your debt with the highest monthly payment first. Or you could choose to pay off your smallest debt first and then focus on the most expensive debt next.

Each of these strategies works in the same basic way:

1. Make an ordered debt payoff list. List all of your debts, in order of attack. For the debt snowball method, list your debts from smallest to largest balance. For the debt avalanche method, list your debts from highest to lowest interest rate. 

2. Pay off your priority debt. Focus on sending all of your extra money to your top-priority debt, while making the minimum payments on the others. Review your budget to identify expenses you could cut, even temporarily, to clear your debts faster. Also look for ways to bring more money in.

3. Pay off the next debt on your list (and so on). Congrats! You paid off your first debt. Take the monthly payment from that old debt, and add it to your next monthly payment. 

The total amount you pay each month shouldn’t go down. When you pay off a debt, add its entire payment to the minimum payment you were already making on the next debt.  By the time you’re at the last debt on your list, your entire payment will all go to one debt. That’ll help you blast that last debt right out of your life.

How to Balance Debt Repayment With Other Financial Goals

The debt snowball and debt avalanche methods rely on devoting all of your extra cash to paying off debt. But we’re not robots, after all, and it’s a good idea to build some flexibility into your debt repayment plans. Here are a few points to keep in mind:

• Save up a basic emergency fund first. Before you start paying extra toward debt, it’s best to save up a small emergency fund, such as $1,000 or one month’s worth of expenses. This helps you avoid taking on new debt if unexpected expenses come up while you’re paying off your current debt. (Tip: unexpected expenses always come up.) 

• Give yourself grace. It’s normal to fall off the bandwagon sometimes. Don’t beat yourself up. We all need breaks from time to time, and that rest time can help us make big progress toward our goals when we're ready. 

• Revisit your budget. Your budget is a personal spending map, so use it to help you make decisions about how to use your money. You get to choose to spend each one of your dollars in the way that’s most important to you. 

Choosing the Right Debt Payoff Strategy

It can be tough to choose how to prioritize which debt to pay off first, but don’t stress about it too much. It’s far more impactful that you’ve made the decision to tackle your debt. Just pick one and get started. You can always adjust later, as needed.