Pay Off Debts Smallest to Largest: Rule 4

This is Rule 4 in my 10 Rules to End Your Debt and Change Your Life

Now that we’ve compiled all of our bills, debts and monthly spending in one place, it’s time to move forward with debt payoff.

On your monthly debt budget, make sure you list your debts (credit cards, student loans, personal loans) in order, smallest to largest, by dollar amount.

This is the order we are going to pay them off.

Now you may already be thinking “Wouldn’t it make more sense to rank them by interest rate and pay off the highest rate first to save money?”

I find myself channeling Dave Ramsey in my response: If you are such a math expert, how did you get in debt in the first place?

The point I’m trying to make is that personal finance, at least the part about getting out of debt, is not about math. It’s about changing your behaviors and the way you think about money.

So yes, you would save a little bit of money by paying debts off by interest rate, but in my experience, you will be more successful if you build momentum and success by knocking out the smaller debts and reducing the number of creditors to whom you own money.

Start Small but Move Fast

When I first started making my debt payoff chart, I was shocked to see just how many department stores and credit card companies I owed money to. There was no way I was going to leave a $456 debt from Famous-Barr on my debt payoff chart for a year while I paid off something with a higher interest rate.

I wanted to get all those small debts off the books, cut up the cards, reduce the paperwork I had to keep track of, and move on with my life.

Every few months of following this plan I was able to tell another creditor “Thanks, but no thanks,” and send them packing.

So to make this work, we have to find extra money to throw at the smallest debt, because we can’t just pay the minimum payment due on each debt. This is why we worked on some of the previous Rules like spending less than you earn and making a debt budget.

The next two Rules in this series will focus on helping you find extra money to pay off your debts.

So we are only paying the minimum payment due on all debts, except the smallest one, where we are sending every extra penny we can find.

Pay Your Progress Forward

The second main part of Rule 4 is to use the Debt Snowball method popularized by Ramsey as you move forward with debt payoff. What this means is that your efforts are like a snowball rolling down a hill. They start off small and slow, but build momentum and get bigger as time goes on.

Your snowball gets bigger by paying off a debt, then acting as if it is still there. That means just because you paid off a store card with a minimum payment, you don’t magically have extra money to spend on food or clothes. You have to pretend that you still owe that minimum due, and pay it towards the next smallest debt.

So let’s take a look at our fictional Jones Family from last week’s post. We can see that they have two credit cards with large balances, two student loans, and a personal loan. They have ordered them from smallest to largest on their chart.

In the white column on the far right, we see what they were able to pay towards their debts for this particular month. Though the minimum payment for their smallest debt is only $25, they paid a total of $675, meaning they were able to find an extra $650 to throw towards their debt.

This also means that when this debt is paid off, they can take the extra $650 PLUS the $25 minimum due, and start paying that amount at the next largest debt. As each debt is paid off, a little bit of extra money is added to paying off the next one, hence the snowball effect. This should give them $700 per month to throw at the next debt on the list.

As I mentioned before, this concept of debt payoff is controversial amongst those who give personal finance advice. And before I move on, I don’t want to suggest that you WILL fail if you choose to pay them off by interest rate.

I will say that I have been successful following this method, and that the momentum you will build by knocking out some of these small debts, minimizing the amount of paperwork and bills you have to keep track of each month, will outweigh the small monetary benefit of paying them off by interest rate.

Go ahead and run your numbers if you can. If you find that you will only pay your debt off a few months quicker over a multi-year period, is it really worth it to keep paying a minimum on a small debt for a long time, increasing the likelihood that you will accidentally miss a payment?

These 10 Rules are the rules that have worked for me. That is why I am sharing them with you. You won’t find any lectures on this site, nor will you find judgment. If you choose to go a different route and it works, I’m happy for you. I’m just trying to suggest the method that I think will work for the greatest amount of people.

Goal 1: Find as much extra money as possible to throw at your smallest debt.

Goal 2: Stay on top of all the previous Rules.


10 Rules to Eliminate Your Debt and Change Your Life

1. Combine Incomes, Finances and Efforts 

2. Spend Less than You Earn

3. Make a Monthly Debt Budget and Live by It 

4. Pay Off Debts Smallest to Largest, Regardless of Interest Rates

5. Make Big Changes for Big Results 

6. If You Don’t Need It, Sell It 

7. Save Monthly for Large, Anticipated Expenses

8. Set Aside Some Money for Fun

9. Pay Off Debts Before Investing 

10. The Goal of Work is Retirement 

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29 thoughts on “Pay Off Debts Smallest to Largest: Rule 4

  1. When I was paying off my nearly $60k in debt I started out using the smallest debt method. I had the same thoughts as you, there was no way I was going to to let that $400 debt sit there waiting for the larger, but higher interest debts to get paid off. Once I had the smallest debts paid off (those under $1000) I then switched to focusing on the higher interest debts. And I also used the debt snowball so everything kept building as each debt got paid off. It worked for me 🙂
    Money Infant recently posted..Rich People Doesn’t Mean Happy PeopleMy Profile

    • The snowball is the most important part because it keeps you from thinking you’ve made more progress than you really have. It also keeps you committed. Thanks MI for stopping by!

  2. Because of my Type A personality, I love doing it this way because I get to see fewer loans. But, both of my debts are about the same so I will just pay off the one with the higher interest rate first, I suppose!

    • Hey Daisy – good to see you. I agree – the fewer creditors the better. If you have two with the same balance, I’d go for the higher rate first.

  3. Naturally I would want to pay off my highest interest debt first. Still I could see the benefits to targeting the smallest debts first. Not only does it clear up paperwork, but it gives you the rewarding feeling of clearing some of the debts. You’d feel better completely paying off a $500 debt rather than paying off $500 of a $10k debt.
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    • My thoughts exactly. The chances of getting a late fee on a $200 bill because the envelope fell between your car seats just isn’t worth it. Plus they could charge you an annual fee. Better to send them packing.

  4. i agree with the “smaller debt first” approach.. 90% of the time.

    the fewer minimum payments that you have, the larger amount of payments you can make towards whatever debt you are attacking at that given moment.

    if possible, use a home equity loan or a balance transfer to get your “larger” debts down to a lower rate..
    jefferson recently posted..How Much Do Your Kids Know About Money?My Profile

    • Hey Jefferson! I remember when balance transfer offers used to come 5 a day until the recession. I don’t have credit card debt and haven’t for a few years. Do you know if they still come often? I received one the other day, but don’t see them very often at all.

  5. I’m close to having 1k saved for my e-fund. I’m unable to chunk out debt yet, but I’m hoping to pay off one credit card with my tax refund. I’m tempted to send the 1k to a credit card… what do you suggest? By paying off close to 3k that would be 1/3 of the cc debt. I feel confident that we wouldn’t use the card again, but in a way that credit line would become my e-fund.

    • I would say that since you are so close to getting that refund, I would hold out and prevent your credit card from becoming the e-fund. You are about to pass a nice milestone with the e-fund. Once you get that money you will have some strong momentum to pay off the c/c. Great question!

    • I would apply the extra 1k to the credit card and then use the credit card as your e-fund. IF an emergency occurs, you’re the same in both scenarios. IF an emergency doesn’t occur, then you’re better off. Why wouldn’t you choose this scenario?
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    • Yeah, I’m a Dave guy. I part ways with him when it comes to living like no one else. I like to travel NOW and don’t want to take chances. If I can pay off debt and travel, than dadgum it I’m gonna stop fighting with myself and just do it and be happy!

  6. I agree by paying off smaller debts, it will make a person feel like they have achieved something. Then they should move to the biggere debts as it takes longer to repay.

  7. I completely agree with you. Of course I listen to Dave Ramsey. I wont say that those who do it highest interest first will fail, but they do get denied that view of success that keeps us going.

    • Exactly Jeff. It’s hard to say that doing it differently is wrong, but if one fails, hindsight might show that this approach would work better.

      Thanks for reading!

    • We actually do pay the highest interest first which is a little frustrating to me but my accountant husband won’t have it any other way. Instead, we mentally divided our loans by 7 (We have 7 government-issued student loans combined between the two of us…four degrees total was a little pricey!) Every time we pay off 1/7th of the total amount, we feel like we get the same sense of satisfaction. Once we did the math, we realized we were saving ourselves around 1k in interest over the 2.5 years it will take us to completely pay off all of our student loans and will be debt free two months sooner. While I normally agree that attacking the smallest loan first makes sense for motivational purposes, I think there are other ways to achieve that result and when you’re married to a money man, there’s no point in arguing.

  8. Not having debts at all in the first place would be the best option. People if you should stop buying things with the money they don’t have…
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  9. Honestly, I’ve always disagreed with this statement. Paying off higher interest loans simply makes way more sense to me. For example, I borrowed $3000 dollars from my father and agreed to pay $150 a month until the full amount was paid back. This was a zero interest loan. On the other hand, I had $8000 in credit card debt, paying 17.999% interest. Why would I pay off a zero interest loan when I have an extremely high interest debt? Doesn’t make any sense to me, whatsoever. To each his own though, personal finance is in fact personal…

    • I agree that it’s a personal choice. For me I’d rather pay off my relative quickly because debt, especially to those we love, really bothers me. I think it’s better to build momentum and wins at the front end, so that way if you give up after a year at least you have fewer creditors.

      Thanks for reading and commenting Nicholas

  10. If anyone is trying to decide between these two approaches, they should look at how much money they are paying in interest every month. They might reconsider. If they are concerned with staying motivated, they should make a nice progress chart and watch the debt drop each month. It’ll teach you to be patient, which is a good approach/lesson to have with finances in general. Personally, I wanted to pay off the small debts first, but it’s a waste of money for self satisfaction. Instead, for immediate gratification, I do side work/sell things, which makes progress feel tangible.

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