Pay Highest Interest Rate First
Well-known American author, financial advisor, and television host Suze Orman has her own methods for eliminating and paying down debt. In contrast to Dave Ramsey’s technique, which aims to keep the debtor encouraged by emphasizing momentum, Orman’s prioritizes the numbers. Orman advocates paying off the debt with the highest interest rate before any others. Here is a breakdown of her plan:
First, you would figure out the largest monthly payment you could afford to make toward your combined debts.
Next, you would add $10 to the minimum monthly payment for each account or loan, and then find the sum of the minimum monthly payments plus the $10 you added previously.
The idea here is that if the difference between the first figure and the second figure is greater than the second figure itself, you apply this difference to the debt with the highest interest rate – the one that is costing you the most money.
Once you have paid off this debt, you repeat this process in descending order of the interest rates, so as to eliminate the most costly debts first. This is one of the main ideas of Orman’s method. She also stresses the importance of paying more than the minimum monthly payment at the highest amount you can afford. This will reduce the time it takes to pay off a loan or credit card. Once you have eliminated your debt, Orman advises that you continue to set aside the amount of your monthly payments to build a savings for your future.
Ramsey’s and Orman’s methods, just as any others, have their fans and their critics. You are the only one who can determine which debt management plan is right for you.