Getting Out: Payoff Strategies That Work

There are two well-known ways to order debts for repayment, an enormous amount of argument about which is correct, and a straightforward answer that most of the argument talks past.

Both start the same way: you pay the minimum on everything, always, and put every spare dollar against exactly one debt until it is gone. The strategies differ only in which debt you point at.

There are two well-known ways to decide which debt to attack first, a lot of argument about which is right, and a fairly simple answer that most of the argument misses.

Both methods start the same: pay the minimum on everything, every month, and throw every spare dollar at exactly one debt until it's gone. The only difference is which one you pick.

Say you owe a few different people. There are two popular ways to decide who to pay back first, and people argue about them a lot.

Both ways agree on the important part: keep every promise to everybody, every month, and then put anything extra toward just one of them until it's finished. Not a little to each — all of it to one.

Highest rate first. Order your debts by interest rate and attack the most expensive one, regardless of its size. Hold the monthly total steady and this is arithmetically optimal — it costs the least in total interest, because you are always killing the fastest-growing debt.

Smallest balance first. Order by amount owed and attack the smallest, regardless of rate. This costs somewhat more in total. In exchange it produces a finished debt sooner — often much sooner — and then another.

The first way: pay off whichever one is growing the fastest, even if it's big. This costs the least in the end. It's the answer arithmetic gives.

The second way: pay off the smallest one first, even if it isn't the fastest-growing. This costs a bit more — but you finish something soon, and then something else.

Stop the inflow first. A payoff plan competing with continued borrowing is not a plan. If the balance you are attacking keeps being refilled, the order you attack it in is irrelevant.

Put a small buffer aside first, even while in debt. This looks wrong — why save at a low rate while owing at a high one? Because without a buffer, the first unexpected expense goes straight back onto the card you are paying down, and the plan resets. A modest cushion is not competing with the debt; it is protecting the repayment from being undone.

Stop adding to it first. A payoff plan that competes with new borrowing isn't a plan. If the balance keeps getting refilled, the order you attack it in doesn't matter.

Save a small cushion first, even though you're in debt. This sounds backwards — why save at a low rate while owing at a high one? Because without a cushion, the first surprise expense goes right back on the card and the whole plan resets. The cushion isn't competing with the debt; it's protecting the work you've done.

Two things come first, before you pick either way.

Stop the hole getting bigger. You can't empty a bucket that's still filling.

And keep a little bit set aside, even while you owe. It seems backwards. But if something unexpected happens and you have nothing saved, it all goes back on the card and you start over.

Watch the order change the total

What grown-ups check

Enter your real debts and try both orders. Two things usually surprise people: how much a small increase in the monthly total shortens everything, and how close the two strategies are on total cost. Once you have seen the gap for your own numbers, the choice stops being theoretical.

Grown-ups put their real numbers into a calculator to compare the two ways. What usually surprises them is how small the difference is — and how much faster everything finishes if they can pay even a little extra each month.