What order should you pay off your debt?

The eternal debate, once someone starts on the road to paying off (or at least reducing) debt is short, simple and sounds innocent enough: Which one first?

In fact, when I started down this road, a friend and I talked about it at length. (I won’t mention his name but he can speak up if he wishes.) He disagreed with the conventional wisdom of paying off your smallest debt first. Mathematically speaking, you save more by paying them off in order of interest rate.

Unlike me, he can actually do the math to prove it. We did some interest rate calculations in my college math class, but my instructor somewhat gleefully pointed out that in the real world, interest rates aren’t calculated that way, because the way we were doing it in this class is harder. I’ll spare you the rant.

My friend is actually good at math, and has the college degrees to prove it. And if you do the math, it appears that one can save hundreds of dollars, if not more, by paying off the highest interest debt first.

So why do the debt-free advocates suggest paying the debts off in any order other than that?

One reason is the personal experience of finance blogger J.D. Roth. He tried it in order, didn’t feel like he was getting anywhere, and gave up.

The problem is feelings. Emotions are fickle. Logic says you’re getting somewhere, but until you’ve eliminated that first debt, it just feels like you’re making all of these sacrifices but you’re still writing the same number of checks every month. And since some bills don’t tell you the full amount that you still owe, you might not even have the comfort of being able to watch that number go down.

I actually made a point of logging in to my mortgage company’s web site every so often to see my balance. I needed to see that number going down. If I hadn’t done that, I probably would have given up at some point myself.

And since we live in such a touchy-feely society, where every quote in the newspaper and on the news starts with the words “I feel,” it’s no wonder we’re stuck, so we have to do something about it.

Although it goes against my very nature not to do something that could save me hundreds of dollars, I have to look at it another way. If I carried a conventional 30-year mortgage to the end, I would end up paying almost as much in interest as I paid for the house itself. If I bought a $100,000 house, I would pay nearly $100,000 in interest. If I bought a $500,000 house, I would pay nearly $500,000 in interest.

Compared to those kinds of numbers, a few hundred bucks to get my feelings out of the way is a bargain.

But there’s one other factor in the equation: interest rates can change.

It may be a coincidence, but after we paid the house off, we made a payment on my wife’s student loan. The amount wasn’t as much as we’d been paying on the mortgage, because we didn’t have enough left after paying off the mortgage to pay that much. But the amount was much higher than normal, and high enough to remind us that we’re serious about paying off even this last little bit of debt.

The lender got the message too. This week, we got a notice in the mail. They didn’t just cut the interest rate on that loan. They slashed it by about 40 percent.

It could be that the rate was due to reset when we crossed a certain threshold (I’ve never seen the terms of the loan), and this payment just happened to get us across that threshold. Or maybe it’s a desperate attempt to get us to pay that debt off more slowly. Whatever the reason, the timing is interesting.

So the rules can change while the game is going on. And the less it appears you need the credit, the more likely the rules are to change to benefit you, rather than to hurt you even more.

I’m not going to cry over the amount of money my wife and I might have saved by paying our debts off in a slightly different order. I’d rather think about how many years I would have had to work to make the amount I saved by paying off debt early. It’s more productive to just pay it rather than obsess over whether you’re doing it right. And make sure your spouse is on board.

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