Getting out, in the order that costs least

Three debts, one budget. Pay the minimum on everything, and put whatever is left against one of them.

Which one is the entire question, and there are two answers. Highest rate first, because that is where the money is leaking fastest. Or smallest balance first, because that is the one that disappears soonest.

The arithmetic prefers the first. A surprising number of people who succeed used the second, and the reason is not innumeracy.

Run both, on the same numbers

The model below pays off three debts twice — once by rate, once by balance — against a single monthly budget.

Avalanche against snowball

≈ Hypothetical model, not a forecast

Three debts, one budget, paid off highest-rate-first and then smallest-balance-first, side by side.

It assumes

• The same total budget is available every single month without exception.
• No new borrowing happens at any point while the plan runs.
• Interest is charged monthly on the balance before any payment lands.
• Minimum payments stay a fixed share of each original balance until it clears.

It ignores

• Any new borrowing while the plan is running
• Fees, penalty rates and promotional rates that expire
• The behavioural pull of clearing a small debt early, which is the real case for snowball
• Whether the budget is actually affordable month after month

Find the budget that clears everything within twenty-four months on the rate ordering. Then read the interest the ordering itself saved.

Total paid each month600

Total owed today

12,500

Months, highest rate first

25

Months, smallest balance first

26

Interest, highest rate first

2,240

Interest, smallest balance first

3,025

Interest the avalanche avoids

785

Months the avalanche avoids

1

Avalanche clears the debt

1

Snowball clears the debt

1

• Total owed, highest rate first
• Total owed, smallest balance first

◷ Not there yet — keep moving the controls.

At the opening budget the rate ordering finishes in about twenty-five months and the balance ordering in about twenty-six. The interest difference is roughly 785 out of about 3,000 — real money, and about a quarter of the total.

Now the part the chart does not show. Under the rate ordering, the extra payment goes to the largest debt, so the first debt disappears somewhere around month nineteen. Under the balance ordering, the smallest debt is gone in about month four.

Eighteen months of visible progress, bought for about 785.

Two readings

Highest rate first

Put every spare unit against the most expensive debt until it clears, then move to the next most expensive.

Measured in

Total interest paid, and months to clear everything

For example

Clearing a large debt at a punishing rate before a small one at a mild rate.

Rests on

That the person will keep going for two years on a plan that shows no completed result until month nineteen.

Chase it alone and

It is optimal on paper and offers no feedback for a long stretch, and plans with no feedback are the ones that get abandoned in month eight.

Smallest balance first

Clear the smallest debt regardless of its rate, then roll its payment into the next smallest.

Measured in

Months until the first debt is gone, and how many remain

For example

Clearing a small mild-rate debt in month four while a large expensive one sits untouched.

Rests on

That completing something early materially raises the chance the plan is still running two years later.

Chase it alone and

It costs real interest, and the cost grows the wider the gap between the rates. Applied to a small cheap debt next to a very expensive one, it is expensive theatre.

Both sides accept
Both sides agree the size of the budget matters far more than the ordering, that no new borrowing is the binding condition, and that either order beats paying minimums on everything by a wide margin.

Which is which? Put each one on a side.

• Someone who has abandoned two previous repayment attempts

  Highest rate firstSmallest balance first

• A gap of twenty points between the most and least expensive debt

  Highest rate firstSmallest balance first

• Someone with steady income who has run this kind of plan through before

  Highest rate firstSmallest balance first

What matters more than either ordering

Three things, in order of size.

The budget. Moving from 600 to 800 a month takes seven months off the plan and saves several hundred in interest — a larger effect than the ordering by a comfortable margin. Every discussion of ordering is a discussion of the small term.

Not adding new debt while repaying. A plan that clears 12,500 over two years while 4,000 of new borrowing arrives is not a plan, and this is the most common way these fail. The ordering is irrelevant if the total is not falling.

The rate itself. Where a debt can be moved to a lower rate without fees, tricks or a longer term, that beats any amount of clever sequencing. It is also where most of the traps live — a lower monthly payment achieved by extending the term costs more in total while feeling like progress.

Check

Someone consolidates three debts into one loan at a lower rate, and the monthly payment falls by a third. What should be checked first?

Choose one answer

The total amount repayable over the full term, and how the new term compares to the old onesWhether the new rate is genuinely lower than all three old onesWhether the fee for consolidating is reasonableWhether the freed-up monthly amount is put to good use

Check answer

›Why the ordering argument gets so much attentionOptional

It is the part of the problem that has a definite answer, and definite answers attract discussion.

The budget is the dominant term and it is not really a debt question — it is an income and spending question, and answering it is slow, personal and uncomfortable. Whether to add another 200 a month has no general solution.

Which order to pay in, on the other hand, can be settled in a paragraph and argued about indefinitely. The attention any topic gets is a poor guide to how much of the outcome it decides, and this is a clean example.

Worth remembering

• Highest rate first minimises interest; smallest balance first minimises the time to the first debt disappearing.
• Assume three ordinary debts and the ordering is worth roughly a quarter of the interest and about a month.
• The balance ordering buys visible completion early — a first debt gone in about month four rather than month nineteen.
• The size of the budget affects the outcome far more than the ordering does.
• A lower monthly payment achieved by extending the term costs more in total while feeling like progress.