Why you need a priority list when paying off debt

You have decided that you want to be debt free. Congratulations! You think about all the reasons you want to do this. You think about how you could make more money. You think about what you could cut back on to save more money. You think about what you could sell. You set up a budget. The next step is just as important and is often overlooked. You need to figure out your priority list. Basically it’s the order that you want to pay off your debts.

There are many options on which order you should use to pay off your debts. There is the snowball method that is recommended by Dave Ramsey. The basic idea is that you pay off your debts in order from least to most. As you pay off your debts you “snowball” the payment to the next lowest debt. It’s a great option, especially if you have a large number of small to medium debts. Those small payments like $25 really start to add up after you have paid off a few of them off.

There is also the debt avalanche. The idea of this one is that you pay all the excess that you can on your debt with the highest interest rate. You base your priority list on strictly interest rates and nothing else.

The debt snowball has a psychological component that really helps. You get small successes early on that keep you going long enough to create new habits. The biggest complaint about this method is that you may pay more interest over the length of your payoff. The perk to the debt avalanche is that you will save money on interest. The bad part is that it is hard to stay motivated if your first debt is a large one and you feel like you’re not getting anywhere.

We chose to go somewhat in the middle and are also considering our future plans. This would be considered a customized method. We are huge fans of the debt snowball so it had a huge impact on us when we were creating our priority list which I will be covering in detail on my next post.

If you are unsure of which one to choose, I suggest that you write out a list of your debts based on the different methods. This was very helpful for us. We looked them over and discussed how we felt about each option. We took what we liked and created a priority list that worked for us. Regardless of how you create your list, you really do need it. It helps keep you focused on what is to come. When you pay off a debt you know which one will come next automatically. It helps to take the mental effort out of the process while you are in the middle of it. It is much easier to spend the time and effort at the beginning. You can always alter things slightly as you go if you find that something isn’t working for you. The most important thing is to actually write it down. Do not just do it mentally. It doesn’t need to be anything fancy. You could save it as a note in your phone. You could jot it down on a small piece of paper and keep it in your wallet. You could use it as the front page of your debt binder like we do.

Do yourself a favor, set aside some time to write out your priority list. Even if you have little to no debt you need a financial priority list. It can include savings for trips or large purchases. Ours includes much more than debt. Do you use a priority list?