Should I try to pay higher debt with lower Int % or lower debt with higher int%?

Question

I just dipped into my 401k to pay 16k, clearing 2 cards...but others will be "nose to grind-stone"

Answer 1

I hate the idea of borrowing against your 401k. I hope to hell that you didn't withdraw money (and paid a 10% penalty plus taxes on it), which would have been a collasal mistake. But to answer your question:

Pay off the high interest loans first, while continuing to make the minimum payments on *all* your other loans.

More importantly: rearrange your life such that you spend less than you earn. You shouldn't be paying off your debt by depleting (or diminishing) your retirement savings. You should repay your debt by spending less than you earn.

If you don't do so, then it's just a matter of time until you'll have credit card debt again -- and won't have a 401k with which to pay it off.

Good luck,

Doug

Answer 2

Dave Ramsey's plan (which I used to get pretty much debt-free) states that you pay the minimums on everything except the item with the lowest balance. Pay all your extra toward that. You should pay it off very very quickly (a month or two) then you take the money you were paying on that and roll it to the next largest balance, etc.

Mathmatecally, you should pay the highest interest first, but your GUT will feel better if you start seeing your debt reduced using this "debt snowball" technique. It was amazing when we got to the point that we were payng an extra GRAND on our car each month!!.

One other thing (sorry it is too late) is that you should NEVER take money out of 401(k). You pay taxes and penalties and you are sacrificing your future security. Think of what that 16k would have become if you'd left it there until retirement. Also, I don't care what interest rate you are paying, it is not more than the penalties and taxes you paid on that 16k.

Anyway, I listen to Dave regularly and firmly believe in his plan. I've used it myself and IT WORKS.

Check out his website or get his books and you will really get motivated.

Hope that helps,

Rick

Answer 3

Pay the higher percent one first. You'd save less interest if you put the same amount of money on the lower-interest one.

And I assume you know that you'll owe taxes plus a 10% penalty on the money you took from your 401K. If they deducted something, probably 20%, that might or might not cover what you will end up owing, depending on your tax bracket, so you might owe the IRS when tax time comes. If you are in a 15% bracket and they held out 20%, you could owe an additional $800 on the 401K withdrawal.

Good luck.

Answer 4

pay off the lower debt with the higher interest first. And remember to always pay MORE than the min amount due

Answer 5

Pay the highest interest rate debt first, because it is accummulating interest faster.

Answer 6

Always pay highest interest rate first.