0:00:00.680,0:00:02.869
Let's say that these four items here

0:00:02.869,0:00:04.503
represent your outstanding debt.

0:00:04.503,0:00:06.005
So, the first number in each row

0:00:06.005,0:00:07.748
is the outstanding loan balance.

0:00:07.748,0:00:08.837
For example, this credit card,

0:00:08.837,0:00:11.646
you have $500 outstanding balance.

0:00:11.646,0:00:15.501
The second number is your APR, 15% for the credit card,

0:00:15.501,0:00:18.025
30% for the retail card, 10% for this loan,

0:00:18.025,0:00:19.686
5% for this loan.

0:00:19.686,0:00:21.149
And then the last number I have listed here

0:00:21.149,0:00:22.422
is your minimum payment.

0:00:22.422,0:00:23.918
So, you have a minimum payment every month.

0:00:23.918,0:00:27.532
Let's see, 20 plus 30 is 50, plus another 150.

0:00:27.532,0:00:31.449
You have a minimum payment every month of $200.

0:00:32.843,0:00:35.354
And your total outstanding loan,

0:00:35.354,0:00:38.731
your total outstanding loan balance is, let's see.

0:00:38.731,0:00:42.048
This is 3,500 plus 500 is 4,000 plus 4,000 is 8,000,

0:00:42.048,0:00:44.177
plus another 2,000 is 10,000.

0:00:44.177,0:00:45.688
So, you owe $10,000.

0:00:45.688,0:00:47.778
Your minimum payment is $200.

0:00:47.778,0:00:49.523
But let's say that you have more than $200

0:00:49.523,0:00:50.713
to pay every month.

0:00:50.713,0:00:53.331
Let's say that you have $300,

0:00:53.331,0:00:55.581
$300 every month available.

0:00:56.697,0:00:58.592
So, the question is, what do you do

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after you pay the minimum payments?

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What do you do with that extra hundred dollars?

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As you can imagine, I'm going to tell you

0:01:04.170,0:01:08.081
that you should use that to pay down your debt

0:01:08.081,0:01:10.165
so that you can pay it down as fast as possible.

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But then you might say,

0:01:10.998,0:01:12.670
"Well, which debt do I pay down first?

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"Do I just split that $400 four ways

0:01:14.632,0:01:17.256
"to pay off 25 more than each of these minimum payments?

0:01:17.256,0:01:19.543
"Do I pay the largest amount first,

0:01:19.543,0:01:20.838
"the smallest amount first?

0:01:20.838,0:01:23.086
"Do I pay the highest interest first?"

0:01:23.086,0:01:26.030
And those are all possible ways of doing it

0:01:26.030,0:01:29.597
but the mathematically optimal way of doing it

0:01:29.597,0:01:33.180
is to pay down the highest cost debt first.

0:01:34.321,0:01:38.488
So, that method is often called the high rate method.

0:01:42.539,0:01:44.385
Where you want to pay down your highest,

0:01:44.385,0:01:46.441
your most costly debt first.

0:01:46.441,0:01:48.633
Which in this case is the retail card.

0:01:48.633,0:01:51.296
So, the order in which you would pay it is,

0:01:51.296,0:01:53.448
the order in which you would pay it is--

0:01:53.448,0:01:54.752
You would pay all the minimum payments

0:01:54.752,0:01:57.211
and then any extra money that you would have,

0:01:57.211,0:02:01.508
you would put it towards the retail card first.

0:02:01.508,0:02:04.332
Once the retail card is paid off,

0:02:04.332,0:02:05.467
let's see, after that the credit card

0:02:05.467,0:02:07.516
has the next highest interest.

0:02:07.516,0:02:09.099
So, copy and paste.

0:02:10.260,0:02:14.409
Then, these two loans, they're already in order, 10%, 5%.

0:02:14.409,0:02:17.812
So, I'm just ordering these form highest interest cost

0:02:17.812,0:02:19.812
to lowest interest cost.

0:02:22.662,0:02:24.986
In this world, you would want to,

0:02:24.986,0:02:26.593
essentially, rank them in this way.

0:02:26.593,0:02:28.929
You obviously have to pay their minimum payments

0:02:28.929,0:02:31.364
every month which is $200 but then I would take

0:02:31.364,0:02:34.506
that extra hundred dollars that you have available

0:02:34.506,0:02:36.627
and put it to the most costly debt.

0:02:36.627,0:02:40.204
So, I would put that extra hundred dollars right over here

0:02:40.204,0:02:43.436
and try to pay this one down as fast as possible.

0:02:43.436,0:02:47.211
Once that is paid off, then I would put any extra you have

0:02:47.211,0:02:49.560
after the minimum payments to the credit card.

0:02:49.560,0:02:51.646
And once that's paid off as well, then to loan A.

0:02:51.646,0:02:53.543
Once that's paid off, to loan B

0:02:53.543,0:02:57.745
and hopefully you are then, you might be then debt-free.

0:02:57.745,0:03:00.553
If you did the high rate method right over here,

0:03:00.553,0:03:02.882
you would, and you don't incur any new debt,

0:03:02.882,0:03:06.132
you would be debt-free after 47 months.

0:03:08.446,0:03:10.517
And you would pay an aggregate interest

0:03:10.517,0:03:12.767
of approximately 39, $3,904

0:03:16.044,0:03:18.794
in interest over those 47 months.

0:03:20.967,0:03:22.736
So, you say, "Okay, Sal, I get it.

0:03:22.736,0:03:26.800
"This is the mathematically optimal thing to do

0:03:26.800,0:03:29.286
"to get rid of your most costly thing first

0:03:29.286,0:03:31.258
"which makes sense`and then your next costly thing

0:03:31.258,0:03:33.326
"and then on and on."

0:03:33.326,0:03:36.755
But you tell me, "Well, you know, psychology matters here.

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"Psychology, maybe, got me into this debt a little bit.

0:03:40.188,0:03:43.929
"So, for me, I don't like having my brain always thinking

0:03:43.929,0:03:46.457
"about all of these four pieces of debt.

0:03:46.457,0:03:49.829
"So, I would just love to maybe not have to worry

0:03:49.829,0:03:51.197
"about four things and get to worrying

0:03:51.197,0:03:52.851
"about three things as soon as possible

0:03:52.851,0:03:55.027
"and then two things as soon as possible."

0:03:55.027,0:03:57.187
So, if you think that is helpful,

0:03:57.187,0:03:58.451
there is a method where you say,

0:03:58.451,0:04:01.564
"Okay, I'm gonna pay my smallest balance first

0:04:01.564,0:04:03.475
"to just get that out of the way."

0:04:03.475,0:04:05.867
Now, keep in mind, if that works for you,

0:04:05.867,0:04:08.070
if that psychologically allows you to say,

0:04:08.070,0:04:09.611
"Okay, that hundred dollars

0:04:09.611,0:04:12.199
"is gonna make a bigger dent here," that's great.

0:04:12.199,0:04:14.235
That's actually called the snowball method.

0:04:14.235,0:04:15.331
Let me write here.

0:04:15.331,0:04:17.283
The idea is a snowball, you get one debt out of the way

0:04:17.283,0:04:18.654
and then you snowball into the next.

0:04:18.654,0:04:21.497
But that, just to be clear is not mathematically optimal.

0:04:21.497,0:04:23.425
It will take you longer to pay your debt

0:04:23.425,0:04:24.804
and you will pay more interest.

0:04:24.804,0:04:26.241
But, I'll just write that down

0:04:26.241,0:04:29.908
because the important thing is that you feel

0:04:31.078,0:04:32.404
that you should put the hundred dollars

0:04:32.404,0:04:34.198
to paying down the debt that you don't use it

0:04:34.198,0:04:35.700
for something else.

0:04:35.700,0:04:37.617
So, the snowball method

0:04:43.703,0:04:46.087
would order these things differently.

0:04:46.087,0:04:48.855
Under the snowball method, you would put your--

0:04:48.855,0:04:51.415
Let's see, your credit card has the smallest loan balance.

0:04:51.415,0:04:53.403
So, let me put that first.

0:04:53.403,0:04:54.986
So, copy and paste.

0:04:56.237,0:04:58.209
That's your credit card.

0:04:58.209,0:05:01.226
Then, after that, let's see, you have loan A.

0:05:01.226,0:05:03.155
You have loan A here.

0:05:03.155,0:05:05.585
So, let me copy and paste that.

0:05:05.585,0:05:08.170
Copy and paste loan A.

0:05:08.170,0:05:10.749
Then you have loan B.

0:05:10.749,0:05:11.666
So, loan B.

0:05:13.093,0:05:16.033
Oh, actually, yup, then you have loan B.

0:05:16.033,0:05:17.283
Copy and paste.

0:05:18.542,0:05:21.070
And then you have your retail card.

0:05:21.070,0:05:22.974
And then you have your retail card.

0:05:22.974,0:05:27.746
And you could see why this isn't gonna work out well.

0:05:27.746,0:05:30.844
Why this isn't gonna work out well mathematically

0:05:30.844,0:05:32.840
'cause you're leaving your most expensive--

0:05:32.840,0:05:35.866
You're paying just the minimum on your most expensive,

0:05:35.866,0:05:38.246
on your most expensive debt.

0:05:38.246,0:05:41.295
Not only is it expensive, it's expensive on a large amount.

0:05:41.295,0:05:43.575
But, let's just go through the...

0:05:43.575,0:05:47.277
So, you might find it more psychologically easy

0:05:47.277,0:05:49.771
to do this method because you at least get rid

0:05:49.771,0:05:52.854
of the credit card debt a lot faster.

0:05:54.695,0:05:56.806
You'll get down to only three sources of debt

0:05:56.806,0:05:59.559
versus four much, much faster.

0:05:59.559,0:06:01.640
So, in this situation, you would pay down

0:06:01.640,0:06:03.839
the credit card first.

0:06:03.839,0:06:05.751
So, you'd be able to knock these off faster.

0:06:05.751,0:06:08.310
But, just so you make sure, there is a trade off.

0:06:08.310,0:06:11.810
In this one, it's gonna take you 54 months

0:06:12.683,0:06:13.618
to pay of your debt.

0:06:13.618,0:06:16.389
So, seven months longer, more than half a year longer.

0:06:16.389,0:06:18.187
You're going to be making payments.

0:06:18.187,0:06:21.643
And you're going to pay almost double in interest.

0:06:21.643,0:06:25.810
You're gonna pay 6,000, approximately $6,000 in interest

0:06:27.733,0:06:30.357
in this situation versus

0:06:30.357,0:06:32.683
I guess about 50% more.

0:06:32.683,0:06:34.459
So, here you're paying almost 4,000 in interest.

0:06:34.459,0:06:38.684
Here you're paying roughly $6,000 in interest

0:06:38.684,0:06:40.267
over the 54 months.

0:06:42.738,0:06:45.019
The mathematically rational one to do

0:06:45.019,0:06:46.794
would be the high rate method.

0:06:46.794,0:06:50.374
But this is, you know, whatever it does.

0:06:50.374,0:06:53.005
Assuming you have the money, as long as you put it

0:06:53.005,0:06:55.071
down towards your debt, at least you're making progress.

0:06:55.071,0:06:57.295
And this is a method that some people might want to use

0:06:57.295,0:06:59.375
more for psychological purposes.

0:06:59.375,0:07:02.033
I have to admit, I have done this where I just wanted

0:07:02.033,0:07:05.674
some debt out of the way so I pay down the small one first.

0:07:05.674,0:07:07.543
But, if you really want to optimize

0:07:07.543,0:07:09.929
for interest payments and paying down fast,

0:07:09.929,0:07:13.814
you want to take out your costliest things first.