What's the best way to pay down multiple sources of debt? It turns out most people don't care. (But here it is.)

Today, I wanted to review some new research (published in the American Economic Review in March 2019) which shows that many people completely ignore interest rates when paying down multiple debts.

In some cases this could lead people to spend hundreds, and in some cases thousands of dollars in interest they don't need to.

Synopsis

• The fastest way to pay off multiple sources of debt is to prioritize repayments based on highest interest rate first (the "Avalanche" method")
• An alternative method which prioritizes the smallest balance first (the "Snowball" method") is sometimes recommended to help build momentum by reducing the number of debt sources more quickly
• The research shows that people rarely do either and instead resort to a simple rule of thumb called "Balance Matching" in which they simply match the size of repayments to the size of balances
• This indicates that people rarely sit down to strategize the best way to pay down their debts and that this could lead to paying hundreds or even thousands of dollars in extra, unnecessary interest payments annually

The Takeaway:

Spending even 15 minutes to create an action plan for the sequence of tackling debts can be worth hundreds, or even thousands of dollars. For a handy online calculator that helps figure out just how much you can save by re-ordering your debt payment priorities, check out: https://unbury.me

Resources for you:

More info (Client touchpoint?): You can send a link to a Globe and Mail column which discusses this research at an approachable level. Ask clients to contact you if they would like to discuss how they can optimize their debt repayments.

Video resources: 

I put together a video breaking it all down. (I put a consumer-facing version on my Youtube channel. You can share that version with clients if you are a financial advisor.)

Here's the video: