After visiting the hospital emergency room with a head concussion, I felt like I fell down a second time when I got the bill. Falling into debt was just as scary. I have always heard it’s better to pay off debt with the highest interest rate before tackling debt with low or no interest. So when the hospital worked me up a payment plan at zero interest, I could have taken my time to pay off the debt. Paying the hospital bill every month, however, just brought back my bad memories about my fall. I didn’t care as much about paying off my car loan with a higher interest rate, my mortgage or even credit cards as much as I just wanted to get rid of the medical bills. According to a recent piece by Yahoo Finance, feelings matter when it comes to succeeding at the goal of being completely debt free.
Using the snowball method
A study by researchers at Kellogg School of Management at Northwestern University found people who use the snowball method for one year are 14 percent more likely to become debt free. Using the snowball method means paying off the smallest balance first with no regard to interest rate. The idea is to feel good about the little successes to keep the motivation going. People who used the snowball method for four years were 43 percent more likely to become debt free.
Going beyond the math
From a mathematical perspective, it’s more logical to get rid of debt with a high interest rate. When I had the hospital debt, I felt depressed. I wasn’t as bothered by my car loan, even though it had a high interest rate. I figured I’d make progress on the car loan each month as the credit union automatically deducted the car payment amount from my checking account. After paying off the hospital bills, I could then focus on paying off the car loan.
Paying down my mortgage
Once I paid off my hospital bills, car loan and credit card balance, I realized I had enough money leftover each month to really put a dent in my mortgage. I knocked 8 years off my 30-year mortgage by taking the money I used to pay toward my debt. I didn’t change my lifestyle even though I could have relaxed after eliminating the various bills. Paying off a mortgage completely is a daunting task even with a balance now less than $100,000. I stay motivated by counting down each $1,000. I throw away a sticky note with each $1,000 paid off the mortgage balance.
Although I used to be skeptical about the snowball method, it’s been working for me. Whenever I have unforeseen expenses such as a broken appliance or an unexpected medical bill, I pay the smallest bill first. Soon, I’m back on track with my plan to pay off my home and save for the future. And, best of all I just feel better with more financial peace.
More from this contributor:
How Debt Snuck up on Me
I Should Move to a Debt Free State
I Refused to Pay Off my Husband’s Credit Cards