WEBVTT

00:00:00.680 --> 00:00:02.869
Let's say that these four items here

00:00:02.869 --> 00:00:04.503
represent your outstanding debt.

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

00:00:06.005 --> 00:00:07.748
is the outstanding loan balance.

00:00:07.748 --> 00:00:08.837
For example, this credit card,

00:00:08.837 --> 00:00:11.646
you have $500 outstanding balance.

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

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

00:00:18.025 --> 00:00:19.686
5% for this loan.

00:00:19.686 --> 00:00:21.149
And then the last number I have listed here

00:00:21.149 --> 00:00:22.422
is your minimum payment.

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

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

00:00:27.532 --> 00:00:31.449
You have a minimum payment every month of $200.

00:00:32.843 --> 00:00:35.354
And your total outstanding loan,

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

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

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

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

00:00:45.688 --> 00:00:47.778
Your minimum payment is $200.

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

00:00:49.523 --> 00:00:50.713
to pay every month.

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

00:00:53.331 --> 00:00:55.581
$300 every month available.

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

00:00:58.592 --> 00:01:00.132
after you pay the minimum payments?

00:01:00.132 --> 00:01:02.433
What do you do with that extra hundred dollars?

00:01:02.433 --> 00:01:04.170
As you can imagine, I'm going to tell you

00:01:04.170 --> 00:01:08.081
that you should use that to pay down your debt

00:01:08.081 --> 00:01:10.165
so that you can pay it down as fast as possible.

00:01:10.165 --> 00:01:10.998
But then you might say,

00:01:10.998 --> 00:01:12.670
"Well, which debt do I pay down first?

00:01:12.670 --> 00:01:14.632
"Do I just split that $400 four ways

00:01:14.632 --> 00:01:17.256
"to pay off 25 more than each of these minimum payments?

00:01:17.256 --> 00:01:19.543
"Do I pay the largest amount first,

00:01:19.543 --> 00:01:20.838
"the smallest amount first?

00:01:20.838 --> 00:01:23.086
"Do I pay the highest interest first?"

00:01:23.086 --> 00:01:26.030
And those are all possible ways of doing it

00:01:26.030 --> 00:01:29.597
but the mathematically optimal way of doing it

00:01:29.597 --> 00:01:33.180
is to pay down the highest cost debt first.

00:01:34.321 --> 00:01:38.488
So, that method is often called the high rate method.

00:01:42.539 --> 00:01:44.385
Where you want to pay down your highest,

00:01:44.385 --> 00:01:46.441
your most costly debt first.

00:01:46.441 --> 00:01:48.633
Which in this case is the retail card.

00:01:48.633 --> 00:01:51.296
So, the order in which you would pay it is,

00:01:51.296 --> 00:01:53.448
the order in which you would pay it is--

00:01:53.448 --> 00:01:54.752
You would pay all the minimum payments

00:01:54.752 --> 00:01:57.211
and then any extra money that you would have,

00:01:57.211 --> 00:02:01.508
you would put it towards the retail card first.

00:02:01.508 --> 00:02:04.332
Once the retail card is paid off,

00:02:04.332 --> 00:02:05.467
let's see, after that the credit card

00:02:05.467 --> 00:02:07.516
has the next highest interest.

00:02:07.516 --> 00:02:09.099
So, copy and paste.

00:02:10.260 --> 00:02:14.409
Then, these two loans, they're already in order, 10%, 5%.

00:02:14.409 --> 00:02:17.812
So, I'm just ordering these form highest interest cost

00:02:17.812 --> 00:02:19.812
to lowest interest cost.

00:02:22.662 --> 00:02:24.986
In this world, you would want to,

00:02:24.986 --> 00:02:26.593
essentially, rank them in this way.

00:02:26.593 --> 00:02:28.929
You obviously have to pay their minimum payments

00:02:28.929 --> 00:02:31.364
every month which is $200 but then I would take

00:02:31.364 --> 00:02:34.506
that extra hundred dollars that you have available

00:02:34.506 --> 00:02:36.627
and put it to the most costly debt.

00:02:36.627 --> 00:02:40.204
So, I would put that extra hundred dollars right over here

00:02:40.204 --> 00:02:43.436
and try to pay this one down as fast as possible.

00:02:43.436 --> 00:02:47.211
Once that is paid off, then I would put any extra you have

00:02:47.211 --> 00:02:49.560
after the minimum payments to the credit card.

00:02:49.560 --> 00:02:51.646
And once that's paid off as well, then to loan A.

00:02:51.646 --> 00:02:53.543
Once that's paid off, to loan B

00:02:53.543 --> 00:02:57.745
and hopefully you are then, you might be then debt-free.

00:02:57.745 --> 00:03:00.553
If you did the high rate method right over here,

00:03:00.553 --> 00:03:02.882
you would, and you don't incur any new debt,

00:03:02.882 --> 00:03:06.132
you would be debt-free after 47 months.

00:03:08.446 --> 00:03:10.517
And you would pay an aggregate interest

00:03:10.517 --> 00:03:12.767
of approximately 39, $3,904

00:03:16.044 --> 00:03:18.794
in interest over those 47 months.

00:03:20.967 --> 00:03:22.736
So, you say, "Okay, Sal, I get it.

00:03:22.736 --> 00:03:26.800
"This is the mathematically optimal thing to do

00:03:26.800 --> 00:03:29.286
"to get rid of your most costly thing first

00:03:29.286 --> 00:03:31.258
"which makes sense`and then your next costly thing

00:03:31.258 --> 00:03:33.326
"and then on and on."

00:03:33.326 --> 00:03:36.755
But you tell me, "Well, you know, psychology matters here.

00:03:36.755 --> 00:03:40.188
"Psychology, maybe, got me into this debt a little bit.

00:03:40.188 --> 00:03:43.929
"So, for me, I don't like having my brain always thinking

00:03:43.929 --> 00:03:46.457
"about all of these four pieces of debt.

00:03:46.457 --> 00:03:49.829
"So, I would just love to maybe not have to worry

00:03:49.829 --> 00:03:51.197
"about four things and get to worrying

00:03:51.197 --> 00:03:52.851
"about three things as soon as possible

00:03:52.851 --> 00:03:55.027
"and then two things as soon as possible."

00:03:55.027 --> 00:03:57.187
So, if you think that is helpful,

00:03:57.187 --> 00:03:58.451
there is a method where you say,

00:03:58.451 --> 00:04:01.564
"Okay, I'm gonna pay my smallest balance first

00:04:01.564 --> 00:04:03.475
"to just get that out of the way."

00:04:03.475 --> 00:04:05.867
Now, keep in mind, if that works for you,

00:04:05.867 --> 00:04:08.070
if that psychologically allows you to say,

00:04:08.070 --> 00:04:09.611
"Okay, that hundred dollars

00:04:09.611 --> 00:04:12.199
"is gonna make a bigger dent here," that's great.

00:04:12.199 --> 00:04:14.235
That's actually called the snowball method.

00:04:14.235 --> 00:04:15.331
Let me write here.

00:04:15.331 --> 00:04:17.283
The idea is a snowball, you get one debt out of the way

00:04:17.283 --> 00:04:18.654
and then you snowball into the next.

00:04:18.654 --> 00:04:21.497
But that, just to be clear is not mathematically optimal.

00:04:21.497 --> 00:04:23.425
It will take you longer to pay your debt

00:04:23.425 --> 00:04:24.804
and you will pay more interest.

00:04:24.804 --> 00:04:26.241
But, I'll just write that down

00:04:26.241 --> 00:04:29.908
because the important thing is that you feel

00:04:31.078 --> 00:04:32.404
that you should put the hundred dollars

00:04:32.404 --> 00:04:34.198
to paying down the debt that you don't use it

00:04:34.198 --> 00:04:35.700
for something else.

00:04:35.700 --> 00:04:37.617
So, the snowball method

00:04:43.703 --> 00:04:46.087
would order these things differently.

00:04:46.087 --> 00:04:48.855
Under the snowball method, you would put your--

00:04:48.855 --> 00:04:51.415
Let's see, your credit card has the smallest loan balance.

00:04:51.415 --> 00:04:53.403
So, let me put that first.

00:04:53.403 --> 00:04:54.986
So, copy and paste.

00:04:56.237 --> 00:04:58.209
That's your credit card.

00:04:58.209 --> 00:05:01.226
Then, after that, let's see, you have loan A.

00:05:01.226 --> 00:05:03.155
You have loan A here.

00:05:03.155 --> 00:05:05.585
So, let me copy and paste that.

00:05:05.585 --> 00:05:08.170
Copy and paste loan A.

00:05:08.170 --> 00:05:10.749
Then you have loan B.

00:05:10.749 --> 00:05:11.666
So, loan B.

00:05:13.093 --> 00:05:16.033
Oh, actually, yup, then you have loan B.

00:05:16.033 --> 00:05:17.283
Copy and paste.

00:05:18.542 --> 00:05:21.070
And then you have your retail card.

00:05:21.070 --> 00:05:22.974
And then you have your retail card.

00:05:22.974 --> 00:05:27.746
And you could see why this isn't gonna work out well.

00:05:27.746 --> 00:05:30.844
Why this isn't gonna work out well mathematically

00:05:30.844 --> 00:05:32.840
'cause you're leaving your most expensive--

00:05:32.840 --> 00:05:35.866
You're paying just the minimum on your most expensive,

00:05:35.866 --> 00:05:38.246
on your most expensive debt.

00:05:38.246 --> 00:05:41.295
Not only is it expensive, it's expensive on a large amount.

00:05:41.295 --> 00:05:43.575
But, let's just go through the...

00:05:43.575 --> 00:05:47.277
So, you might find it more psychologically easy

00:05:47.277 --> 00:05:49.771
to do this method because you at least get rid

00:05:49.771 --> 00:05:52.854
of the credit card debt a lot faster.

00:05:54.695 --> 00:05:56.806
You'll get down to only three sources of debt

00:05:56.806 --> 00:05:59.559
versus four much, much faster.

00:05:59.559 --> 00:06:01.640
So, in this situation, you would pay down

00:06:01.640 --> 00:06:03.839
the credit card first.

00:06:03.839 --> 00:06:05.751
So, you'd be able to knock these off faster.

00:06:05.751 --> 00:06:08.310
But, just so you make sure, there is a trade off.

00:06:08.310 --> 00:06:11.810
In this one, it's gonna take you 54 months

00:06:12.683 --> 00:06:13.618
to pay of your debt.

00:06:13.618 --> 00:06:16.389
So, seven months longer, more than half a year longer.

00:06:16.389 --> 00:06:18.187
You're going to be making payments.

00:06:18.187 --> 00:06:21.643
And you're going to pay almost double in interest.

00:06:21.643 --> 00:06:25.810
You're gonna pay 6,000, approximately $6,000 in interest

00:06:27.733 --> 00:06:30.357
in this situation versus

00:06:30.357 --> 00:06:32.683
I guess about 50% more.

00:06:32.683 --> 00:06:34.459
So, here you're paying almost 4,000 in interest.

00:06:34.459 --> 00:06:38.684
Here you're paying roughly $6,000 in interest

00:06:38.684 --> 00:06:40.267
over the 54 months.

00:06:42.738 --> 00:06:45.019
The mathematically rational one to do

00:06:45.019 --> 00:06:46.794
would be the high rate method.

00:06:46.794 --> 00:06:50.374
But this is, you know, whatever it does.

00:06:50.374 --> 00:06:53.005
Assuming you have the money, as long as you put it

00:06:53.005 --> 00:06:55.071
down towards your debt, at least you're making progress.

00:06:55.071 --> 00:06:57.295
And this is a method that some people might want to use

00:06:57.295 --> 00:06:59.375
more for psychological purposes.

00:06:59.375 --> 00:07:02.033
I have to admit, I have done this where I just wanted

00:07:02.033 --> 00:07:05.674
some debt out of the way so I pay down the small one first.

00:07:05.674 --> 00:07:07.543
But, if you really want to optimize

00:07:07.543 --> 00:07:09.929
for interest payments and paying down fast,

00:07:09.929 --> 00:07:13.814
you want to take out your costliest things first.