How should you prioritize paying off debts?

Focusing on the smallest debts first is a strategy known as the "debt snowball" method, which is promoted by Dave Ramsey. This approach has several advantages that make it effective for many individuals. Firstly, paying off smaller debts first allows for quick wins, providing a psychological boost and motivation to continue tackling larger debts. The sense of accomplishment from eliminating a debt, no matter how small, can encourage individuals to stay committed to their debt repayment plan.

Additionally, this method can help simplify financial management. Once the smallest debts are paid off, the freed-up funds can be directed toward larger debts, creating a momentum effect that makes the process feel more manageable and less overwhelming. Moreover, prioritizing small debts can lead to the establishment of healthier financial habits and a more consistent repayment rhythm.

In contrast to other approaches, such as tackling the largest debts first, the debt snowball method emphasizes behavior and emotional aspects of personal finance, recognizing that successfully handling smaller debts can lead to better overall financial discipline. Not addressing debts at all, as suggested by ignoring them, leads to compounding problems, including accruing interest and potential damage to credit scores, reinforcing the importance of actively managing and paying off debts systematically.