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Let's say that these four items here

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represent your outstanding debt.

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So, the first number in each row

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is the outstanding loan balance.

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For example, this credit card,

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you have $500 outstanding balance.

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The second number is your APR, 15% for the credit card,

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30% for the retail card, 10% for this loan,

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5% for this loan.

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And then the last number I have listed here

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is your minimum payment.

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So, you have a minimum payment every month.

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Let's see, 20 plus 30 is 50, plus another 150.

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You have a minimum payment every month of $200.

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And your total outstanding loan,

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your total outstanding loan balance is, let's see.

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This is 3,500 plus 500 is 4,000 plus 4,000 is 8,000,

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plus another 2,000 is 10,000.

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So, you owe $10,000.

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Your minimum payment is $200.

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But let's say that you have more than $200

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to pay every month.

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Let's say that you have $300,

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$300 every month available.

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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

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that you should use that to pay down your debt

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so that you can pay it down as fast as possible.

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But then you might say,

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"Well, which debt do I pay down first?

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"Do I just split that $400 four ways

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"to pay off 25 more than each of these minimum payments?

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"Do I pay the largest amount first,

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"the smallest amount first?

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"Do I pay the highest interest first?"

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And those are all possible ways of doing it

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but the mathematically optimal way of doing it

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is to pay down the highest cost debt first.

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So, that method is often called the high rate method.

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Where you want to pay down your highest,

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your most costly debt first.

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Which in this case is the retail card.

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So, the order in which you would pay it is,

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the order in which you would pay it is--

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You would pay all the minimum payments

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and then any extra money that you would have,

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you would put it towards the retail card first.

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Once the retail card is paid off,

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let's see, after that the credit card

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has the next highest interest.

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So, copy and paste.

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Then, these two loans, they're already in order, 10%, 5%.

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So, I'm just ordering these form highest interest cost

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to lowest interest cost.

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In this world, you would want to,

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essentially, rank them in this way.

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You obviously have to pay their minimum payments

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every month which is $200 but then I would take

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that extra hundred dollars that you have available

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and put it to the most costly debt.

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So, I would put that extra hundred dollars right over here

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and try to pay this one down as fast as possible.

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Once that is paid off, then I would put any extra you have

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after the minimum payments to the credit card.

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And once that's paid off as well, then to loan A.

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Once that's paid off, to loan B

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and hopefully you are then, you might be then debt-free.

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If you did the high rate method right over here,

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you would, and you don't incur any new debt,

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you would be debt-free after 47 months.

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And you would pay an aggregate interest

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of approximately 39, $3,904

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in interest over those 47 months.

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So, you say, "Okay, Sal, I get it.

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"This is the mathematically optimal thing to do

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"to get rid of your most costly thing first

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"which makes sense`and then your next costly thing

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"and then on and on."

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But you tell me, "Well, you know, psychology matters here.

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

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"So, for me, I don't like having my brain always thinking

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"about all of these four pieces of debt.

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"So, I would just love to maybe not have to worry

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"about four things and get to worrying

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"about three things as soon as possible

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"and then two things as soon as possible."

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So, if you think that is helpful,

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there is a method where you say,

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"Okay, I'm gonna pay my smallest balance first

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"to just get that out of the way."

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Now, keep in mind, if that works for you,

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if that psychologically allows you to say,

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"Okay, that hundred dollars

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"is gonna make a bigger dent here," that's great.

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That's actually called the snowball method.

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Let me write here.

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The idea is a snowball, you get one debt out of the way

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and then you snowball into the next.

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But that, just to be clear is not mathematically optimal.

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It will take you longer to pay your debt

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and you will pay more interest.

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But, I'll just write that down

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because the important thing is that you feel

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that you should put the hundred dollars

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to paying down the debt that you don't use it

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for something else.

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So, the snowball method

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would order these things differently.

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Under the snowball method, you would put your--

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Let's see, your credit card has the smallest loan balance.

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So, let me put that first.

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So, copy and paste.

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That's your credit card.

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Then, after that, let's see, you have loan A.

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You have loan A here.

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So, let me copy and paste that.

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Copy and paste loan A.

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Then you have loan B.

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So, loan B.

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Oh, actually, yup, then you have loan B.

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Copy and paste.

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And then you have your retail card.

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And then you have your retail card.

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And you could see why this isn't gonna work out well.

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Why this isn't gonna work out well mathematically

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'cause you're leaving your most expensive--

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You're paying just the minimum on your most expensive,

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on your most expensive debt.

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Not only is it expensive, it's expensive on a large amount.

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But, let's just go through the...

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So, you might find it more psychologically easy

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to do this method because you at least get rid

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of the credit card debt a lot faster.

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You'll get down to only three sources of debt

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versus four much, much faster.

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So, in this situation, you would pay down

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the credit card first.

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So, you'd be able to knock these off faster.

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But, just so you make sure, there is a trade off.

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In this one, it's gonna take you 54 months

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to pay of your debt.

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So, seven months longer, more than half a year longer.

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You're going to be making payments.

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And you're going to pay almost double in interest.

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You're gonna pay 6,000, approximately $6,000 in interest

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in this situation versus

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I guess about 50% more.

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So, here you're paying almost 4,000 in interest.

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Here you're paying roughly $6,000 in interest

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over the 54 months.

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The mathematically rational one to do

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would be the high rate method.

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But this is, you know, whatever it does.

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Assuming you have the money, as long as you put it

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down towards your debt, at least you're making progress.

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And this is a method that some people might want to use

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more for psychological purposes.

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I have to admit, I have done this where I just wanted

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some debt out of the way so I pay down the small one first.

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But, if you really want to optimize

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for interest payments and paying down fast,

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you want to take out your costliest things first.