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Stack or Roll?


Last week I gave instructions to put your debts in order from the smallest balance owed to the largest balance owed. And, it is in this order that I intend to instruct you how to pay them off–you will pay the smallest balance first, and when that debt is paid in full, you combine that payment (that you are no longer paying because you are DONE with it) with the payment of the second smallest debt….you roll the first payment into the second debt. This allows payments to get larger and larger as you pay off creditors and is called debt snowballing. This system works for most people, is by far the easiest to understand, and allows you to see quick progress which is most likely to keep people motivated.

But I would be remiss if I didn’t tell you there is another way to organize your debt, and that is by the percentage of interest you are paying–the creditor with the highest interest rate goes at the top of the pile, and you pay off that creditor first. When that debt is paid off, you then add the first debt payment to the debt with the second highest interest rate (like you would with the snowball). This is called debt stacking.  Honestly, this system works better for a very small portion of the population, it does not save THAT much money in the long run, and is a little more confusing.
In my opinion, most people will not be as motivated with debt stacking as they can be with debt snowballing.

If you have picked your preferred method, then list all your debts in the order of that preferred method on the first page of your notebook along with their balances and monthly payments.

Now, let’s get ready for some FUN!

Comments

  1. SharileeJanuary 10, 2020 at 11:29 AM

    So-- as a financial advisor I do have to add that I definitely prefer debt STACKING. My experience working with lots of people is that they DO save money (after all-- you're paying off the highest interest debts first, so less interest in the long run). Also- in most situations you still end up knocking out debts for the mental reward pretty regularly, so you still get that emotional reward of seeing progress. The other thing to keep in mind is that if your higher interest debts are so large that they are going to take a long to pay off, you REALLY want to start knocking them out, because they are costing you in interest! In fact, it's actually time to start putting gazelle level effort towards knocking them out! Most of all, though, know thyself! If you need the frequent mental reward of knocking out a smaller debt quickly, do the snowball. If you can't stand the fact you are wasting money paying interest, then do the debt stacking. Either way, combining it with a little gazelle effort kickstart will go a long way!

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